(Reuters) - The dollar rallied against the Japanese yen on Tuesday as stronger-than-expected U.S. retail sales data drove investors to pare back expectations of possibly dollar-adverse Federal Reserve monetary stimulus. The euro leaped against the yen as well, but eked only a small gain against the greenback as better-than-expected German and French economic output data was tempered by concerns about a slowdown in the broader euro zone region. U.S. data showed retail sales rose for the first time in four months in July, a sign that consumers could drive faster economic growth in the third quarter. The dollar hit a global session high of 78.93 yen, its highest since July 18. It last traded at 78.84, up 0.7 percent on the day, according to Reuters data. "The reports suggest that the U.S. economy continues to grow, although at a slow pace. The numbers moreover reduce the possibility of Fed action at the next meeting," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York. "As a result, we're seeing dollar/yen move higher because this is the pair most sensitive to interest rate expectations," he said. A separate report showed U.S. producer prices climbing in July at the fastest pace in five months. Lowered expectations the Fed could soon launch a third round of bond-buying program, or quantitative easing, to help the economy helped the dollar. If the Fed does opt for QE3 it would be negative for the dollar as it is tantamount to printing money and dilutes its value. The Fed's next scheduled monetary policy meeting is on September 12-13. TALE OF TWO ECONOMIES While the U.S. economy is showing signs of improvement, much of the euro zone remains mired in a recession. Data showed the euro zone as a whole contracted by 0.2 percent in the second quarter, suggesting peripheral countries are faring worse than their stronger core counterparts. German analyst and investor sentiment also dropped more than forecast in August. This caused the euro to pull away from the day's highs. However, it continued to be propped up by expectations the European Central Bank will step in next month to lower Spain and Italy's high borrowing costs after president Mario Draghi's recent pledge to do all it takes to preserve the currency. The euro was last at $1.2342, up 0.1 percent, off an earlier high of $1.2385. More gains could see the euro target chart resistance at $1.2398, the 55-day moving average, and last week's high of $1.2444. "These were modestly better than expected numbers out of France and Germany and these days any number that does not disappoint tends to give the euro support," said Daragh Maher, strategist, at HSBC. The euro also edged higher after a spokeswoman for Germany's constitutional court said no delay was anticipated to an expected verdict on September 12 on the euro zone's rescue funds and the EU's fiscal pact. The verdict is likely to clear some of the uncertainty hanging over the euro. (Additional reporting by Jessica Mortimer in London and Gertrude Chavez-Dreyfuss in New York Editing by W Simon)

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