Click on the arc or circle to dimension. The diameter dimension is now attached to the cursor displaying the dimension. The command prompt reads:
Give Dimension Position:
As you move the cursor the dimension slides around. You will see that if the cursor position is outside the circle then the dimension line extends to the cursor position and the dimension text is orientated horizontally. If the cursor is inside the circle the dimension text is always parallel to and centred on the dimension line. Simply click to accept the position of the dimension.
To edit a Diameter dimension see Modifying/Moving Dimensions.