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LONDON, Aug 15 (Reuters) The euro briefly hit a record high against the yen on Tuesday, buoyed by yield differentials, while the dollar held steady ahead of U.S. inflation data which will could give indications about the interest rate outlook.

With no major euro zone releases due, and some European countries shut for Assumption Day holiday, markets were likely to remain rangebound until the release of U.S. producer prices data for July at 1230 GMT.

Any signs of accelerating inflation in core PPI -- and in consumer prices data due on Wednesday -- would fuel talk that the Federal Reserve might resume tightening after leaving interest rates unchanged this month.

"(The data) needs to surprise on the upside to have a big impact.

A short position squeeze in the dollar will benefit the dollar," said Adam Myers, currency strategist at UBS.

"Euro/yen is hitting record highs all the time. As a funding vehicle the yen remains the carry trade of choice." The euro rose to 148.61 yen on Reuters data, its highest since the single currency was launched in 1999, before retreating to 148.23 by 0945 GMT.

"Looking at a more medium term prospective, I am not sure we've seen the peak," said Teis Knuthsen, head of FX and Fixed Income Research at Danske Markets in Copenhagen, forecasting euro/yen at 149-150 in coming weeks.

The euro was steady at $1.2718. The dollar was down 0.1 percent at 116.55 yen and was off its earlier two-week high against a basket of major currencies.

The core U.S. PPI is seen rising 0.2 percent in July from a month earlier, the same as the reading for June.

CAPITAL FLOWS As well as PPI, Tuesday sees the release of U.S. net capital flows data for June, due at 1300 GMT.

Inflows are seen at $69.9 billion, up slightly from May's $69.6 billion. That would mean the United States attracted enough capital in June to cover the $64.8 billion trade gap.

Foreign buying of Treasury bonds is also expected to have picked up in June, to $15 billion from $13.2 billion in May, in part as a result of higher risk aversion.

Some analysts say funding the U.S. trade deficit might become easier as the U.S. economy slows down, boosting the fixed income markets and discouraging U.S. domestic funds from investing in growth-sensitive Asian and emerging markets.

The NAHB housing market index for August at 1700 GMT could also be of interest given concerns about a slowdown in the U.S. housing market.

In the euro zone, the interest rate outlook seems clearer than in the United States, with the European Central Bank seen tightening once or twice more this year.

Still, the prospect of rising euro rates has done little to boost the single currency despite the ECB suggesting that more rate rises could follow this month's increase to 3 percent.

Benchmark rates in the euro zone compare with 5.25 percent in the United States and 0.25 percent in Japan.

"The general consensus is that we are off for September (Fed tightening). We are going to get more interest rate rises in the euro zone now after (recent strong data)," UBS's Myers said.

Data showed on Monday the euro zone economy posted its fastest growth in six years in the second quarter.

REUTERS VJ ND1724