The dollar remained near a one-week high against the euro on Tuesday though it was slowly paring gains after weaker-than-expected industrial production data and a relatively tame U.S. inflation report.

The consumer price index (search) for July rose 0.5 percent, the U.S. Labor Department reported, with the core reading excluding food and energy rising a softer-than-forecast 0.1 percent.

Economists' median forecast was for a 0.4 percent increase in the overall index and a 0.2 percent rise in the core index.

The dollar had extended gains on the CPI data in early trading but lost ground after a Fed report showed industrial output rose a smaller-than-expected 0.1 percent in July. Wall Street analysts had expected output to rise 0.5 percent.

Capacity utilization slipped in July to 79.7 percent, following a downwardly revised 79.8 percent in June and below economists' expectations for an 80.3 percent showing.

"Both industrial production and capacity utilization came in weaker than expected, specially on the industrial production side," said George Davis, chief FX technical analyst at RBC Capital Markets in Toronto. Taken "in combination with core CPI data, we'll probably see a little bit of U.S. dollar weakness as a result of these numbers."

Midway through the session, the euro (search) was down 0.2 percent against the dollar to $1.2341. It had traded as low as $1.2297. The dollar was last up 0.2 percent against the yen <JPY> at 109.56 yen.

Against the Swiss franc (search) the dollar was last up 0.2 percent at 1.2573 Swiss francs.

Traders said the euro's weak tone could continue in the short term given its failure to test the psychologically important $1.25 level. Its technical support stood at $1.2250.

The dollar "is completely stuck in a range," said Bill Hoerter chief dealer at Alaron Foreign Exchange in Chicago. "But the $1.2250 level will attract attention as there are bids there."

The inflation report is closely watched for clues on how much further the Federal Reserve may tighten monetary policy after raising interest rates to 3.5 percent this month.

"Core (inflation) continues to tick up a little bit but it doesn't have all that many implications for the Fed," said Jason Daw, senior G10 strategist at Merrill Lynch in New York. "I don't think inflation was their big concern... and overall, I don't think inflation is much of a concern."

Though the yen was trading down from the prior New York close, the Japanese unit earlier touched a seven-week high of 109.05 per dollar, bolstered by rising optimism over Japan's economic recovery stemming from strong inflows to Tokyo stocks which hit four-year highs in recent weeks.

This helped push the yield on benchmark 20-year Japanese government bonds to a 9-month high with expectations growing the Bank of Japan would end its zero interest rate policy next year.

The yen also drew support from optimism that Japanese Prime Minister Junichiro Koizumi would win an election on Sept. 11 and drive economic reforms forward in Japan.