By John McCrank

NEW YORK (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 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 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 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 and New Zealand dollars 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 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.

(Reporting by Joh McCrank in New York; additional reporting by Ritvik Carvalho in London, editing by Emelia Sithole-Matarise, Kirsten Donovan)