Jan. 14 (Bloomberg) -- The euro dropped against the dollar for a second day in three in Tokyo and London on speculation the currency's 12-month, 21 percent appreciation may increase calls for the European Central Bank to rein in gains. The euro's advance is ``getting to the pain threshold,'' Greg McKenna, a currency strategist in Sydney at National Australia Bank Ltd., Asia's biggest bank outside Japan, told Bloomberg News in a televised interview. ``The market is paying more heed to what the ECB will do. We could be in for a period of euro weakness.'' The euro fell to $1.2730 at 5:47 a.m. in London from $1.2773 late yesterday in New York, according to EBS prices. The 12-nation currency on Monday reached a record high for the 11th day in the past 18. It dropped to 135.23 yen from 135.67, falling for a third straight day.
``One must know that the main possibility of action rests with'' the ECB, German Chancellor Gerhard Schroeder said yesterday. ECB President Jean-Claude Trichet on Monday said the bank is concerned about ``brutal'' currency swings and member Ernst Welteke yesterday said the euro's appreciation could ``put a brake'' on an economic recovery in Germany. ``What's different this time is such a concern is not only addressed to the ECB, but it is also raised by the ECB itself,'' said Junya Tanase, a currency analyst in Tokyo at J.P. Morgan Chase & Co., the second-largest U.S. bank by assets. ``That may suggest the ECB is seeking to prevent the currency from gaining too fast.'' The euro may drop to $1.24 before resuming its advance to $1.40 by the end of this year, he said.
Contrast
``We are concerned, we're not indifferent,'' Trichet on Monday said at a press conference after a meeting of central bankers from the Group of 10 in Basel, Switzerland. His comments pushed down the euro from a record high of $1.2899. Trichet's comments were in contrast to remarks he made last week, when he said euro gains wouldn't prevent the region's exports from increasing, prompting the biggest euro rally in almost four weeks. Welteke yesterday said he's concerned the stronger euro risks slowing a recovery from a recession in Germany's economy, Europe's largest. ``We fear that the appreciation of the euro could put a brake on the recovery,'' Welteke, who also heads the Bundesbank, said in a speech in Berlin. ``We are watching the direct and indirect effects of the euro appreciation very closely.'' The euro also dropped after the currency's relative strength index increased yesterday to 70.02 on a 14-day basis. A reading above 70 signals buying may lose momentum. The index attempts to identify turning points in the price of an asset by calculating the degree to which daily gains exceed losses over a given period, or vice versa.
Deficit
The euro's decline may stall after Federal Reserve Chairman Alan Greenspan and two other Fed officials said inflation isn't an immediate risk, suggesting the U.S. won't raise interest rates anytime soon. Greenspan said yesterday the dollar's drop hasn't sparked price increases. Federal Reserve Bank of Dallas President Robert McTeer said the Fed has little reason to raise its benchmark interest rate soon and Fed Governor Mark Olson said inflation isn't a threat. The Fed's key overnight rate target is 1 percent, half that of the European Central Bank. The Fed chairman also said yesterday the U.S. can fund the deficit in its current account, the broadest measure of international trade and investment, with few consequences for the global financial system. Greenspan, who spoke in Berlin, met with Schroeder before the speech.
`Shock Absorber'
``Greenspan said it's fine to have the current account deficit as long as the dollar is absorbing the shock of that,'' Clifford Bennett, chief strategist in Sydney at currency forecaster FxMax, told Bloomberg News in a televised interview. ``That means a much lower U.S. dollar.'' The dollar may weaken to $1.40 against the euro in coming months, he said. The yen yesterday strengthened close to 105.90 against the dollar, its highest since September 2000, after sales of yen by Japan on Friday weakened the currency to 108.30. The Japanese currency was little changed at 106.22 per dollar in Tokyo. The Japanese currency's gain yesterday increased concern the Bank of Japan, at the behest of the Ministry of Finance, will sell yen to protect exporters' earnings. ``We will take appropriate action if the currency moves in a speculative manner,'' Finance Minister Sadakazu Tanigaki told reporters yesterday.
`Losing Battle'
The Bank of Japan spent up to $40 billion selling its currency last week, according to estimates from analysts including Ian Gunner, head of foreign exchange in London at Mellon Financial Corp. The ministry will sell 5 trillion yen worth of U.S. Treasuries today to the central bank to obtain funds it will use to stem gains in the currency, the Nihon Keizai newspaper said, without saying where it obtained the information. The ministry needs to replenish the funds after selling about 1 trillion yen on Friday, the newspaper said. Japan sold at least 20.1 trillion yen ($189 billion) last year, limiting the currency's advance against the dollar to 11 percent, compared with the euro's 20 percent gain. ``The BOJ is playing a losing game'' because they can't stop the yen's gains, FxMax's Bennett said.
`Increasing Heat'
European exporters are suffering as the euro's gain makes their products less competitive abroad. Goldman Sachs Group Inc. last week cut its rating on Volkswagen AG and Bayerische Motoren Werke AG, saying German carmakers are under ``severe pressure.'' From the euro's climb above $1.20. ``There is increasing heat over the consequence of the euro's advance,'' said Kenichiro Ikezawa, who helps manage $1 billion of overseas debt at Tokyo's Daiwa SB Investments Ltd., a unit of Japan's second-largest brokerage. ``We'll see more officials seeking to talk down the euro.'' In other trading, the dollar rose to 1.2248 Swiss francs, from 1.2211 in new York. The British pound dropped to $1.8456 from $1.8473. //www.bloomberg.com