Easiest way to dig trench along existing fence

It's physically very difficult to dig a very narrow but deep trench. You may have better luck just renting a ditch digger/trencher, which is kind of like a big chainsaw for dirt. You can dig trenches that are very narrow, and the only thing that really slows you down with it is large rocks.

You should have utilities marked before you dig (whether using a trencher or not). In some areas, this is enforced by law (eg: in Ontario, Canada, it is law under the Ontario Occupational Health And Safety Act).

We had a raised garden built along our new fence joined on one side by a deck. It's raised by about 1/2 a meter.

The way they did it was to use the fence as part of the retaining wall. However, they did add some reinforcing.

In your case, the posts may be too wide apart and you may not like the idea of using the fence for this in case of rot.

I suggest putting new posts into the ground and putting treated 4x2 along them to form the retaining wall. Put it as close to the fence as practical. Then line the dirt side of the wall with a suitable plastic (the kind that's used for building ponds). And fill up the ground to level it.

As for the area between the fence and the retaining wall, you could attach a run of 4x2 or 6x2 along the fence line to form a beam for which you can attach joists and lay some decking timber all the way along. If you raise it up about the dirt level you could use it as seating if it's wide enough.

Remember to add weep holes to the wall to allow the water out.

Alternatively, as you suggest you could use cinder blocks or even just pour concrete. Your choice may depend on price.