FOREX-Euro drops for second day after dovish ECB meeting

* Euro drops after ECB extends bond purchases

* Federal Reserve meeting next week in focus

* Japanese yen highest since February (Updates prices)

By Karen Brettell

NEW YORK, Dec (Shanghai: 600875.SS - news) 9 (Reuters) - The euro dropped on Friday for a second consecutive day in a continued reaction to the European Central Bank's extending its bond-buying program longer than many had anticipated, even as the bank cut the size of the monthly purchases.

The ECB said on Thursday it would reduce its monthly asset buys to 60 billion euros starting in April from 80 billion euros currently and extend purchases to December 2017 from March 2017. It reserved the right to increase the size of purchases again.

Underlying its promise for extensive stimulus, the ECB predicted inflation at 1.7 percent in 2019, arguing that more-costly energy could boost consumer prices even without lifting the underlying trend.

"The extension of the program was longer than most had expected, and a lot of the language ... was pretty dovish," said Erik Nelson, a currency analyst at Wells Fargo (Swiss: WFC-USD.SW - news) in New York. "Inflation forecasts were pretty subdued all the way out to 2019 and growth forecasts were pretty low, and the risks are tilted to the downside."

The euro dropped to $1.0528, its lowest level since Monday, and was last down 0.69 percent at $1.0541.

The U.S. Federal Reserve is widely expected to raise interest rates for the first time this year when it meets next week, but it may take a cautious tone on the economy.

Traders will focus on the Fed's economic projections, known colloquially as the dot plot, for indications of any change in expectations following Donald Trump's surprise election as U.S. president on Nov. 8.

Trump's victory increased market expectations of greater fiscal stimulus that could boost economic growth and inflation.

"In the last three or four meetings, we've seen a continual marking down in the dot plot," Nelson said, "so even if you see the officials maintain the current forecast, it could be viewed as mildly hawkish."

The dollar gained 0.57 percent to 101.68 against a basket of six major currencies. Against the Japanese yen, the greenback rose as high as 115.36 yen, its highest level since Feb. 9, and was last up 1.16 percent at 115.30 yen. (Editing by Leslie Adler)