FOREX-Dollar edges higher, shaking off tame U.S. inflation report

* U.S. CPI core inflation slightly below expectations
* All eyes on U.S. 10-year Treasury auction
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

(Adds dollar moves after U.S. CPI data, analyst comment,
updates prices, changes dateline to New York from London)
By John McCrank
NEW YORK, March 10 (Reuters) - The dollar ticked higher on
Wednesday, rebounding from a slight dip after a tame U.S.
inflation report, while traders looked to an auction of U.S.
10-year Treasury bonds US10YT=RR later in the day that could
spark volatility in currency markets.
U.S. consumer prices posted their biggest annual gain in a
year, though underlying inflation remained tepid amid sluggish
demand for services like airline travel, the data showed.
The move was largely inline with economists' expectations,
though core inflation rose 0.1%, versus market forecasts of a
0.2% rise.
U.S. Treasury yields backtracked slightly following the
data, as market participants had hoped for a more upbeat outlook
on consumer prices. The dollar index has closely tracked a surge in Treasury
yields this year, both because higher yields increase the
currency's appeal and as the bond rout shook investor
confidence, spurring demand for safe-haven assets.
"The drive of the dollar's movement since the beginning of
the year has been U.S. interest rates and I just don't see that
scenario changing," said Joseph Trevisani, senior analyst at
FXSTREET.COM.
The greenback will likely trend higher through mid-year as
the economic recovery gains steam, he said.
The dollar index =USD was up 0.026% at 92.022, having
edged lower earlier in the session following the CPI numbers.
Bond yields could rise further this week as the market
digests a $120 billion auction of 3-, 10-, and 30-year
Treasuries. The 10-year auction today is the main risk to market
sentiment, followed by a 30-year US30YT=RR auction on
Thursday, as low demand could reinstate pressure on U.S.
Treasuries, ING strategists said in a daily note.
"Equally, a good take-up could reiterate the risk-friendly
mood in FX markets observed yesterday. Hence, one should get
ready for a day of volatility with the FX market looking for
signs of confirmation as to whether the risk rally yesterday was
a short-term blip or the tentative start of a trend."
Riskier currencies including the Australian AUD= and New
Zealand dollars NZD= edged lower after logging big gains on
Tuesday on rising prospects for the global economic recovery.
U.S. President Joe Biden is expected to sign a $1.9 trillion
coronavirus aid package as soon as this week. The euro EUR=EBS was down 0.06% at $1.18915 ahead of a
meeting of the European Central Bank on Thursday.
One topic is expected to dominate the ECB meeting: what to
do about rising sovereign bond yields, which if left unchecked
could derail efforts to get the coronavirus-hit economy back on
track. "Although the recent move in bond yields has not spared the
euro zone, the tightening in financial conditions has been far
less of a problem for the ECB given the different nominal
starting point," said Geoff Yu, EMEA market strategist at Bank
of New York Mellon.

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