Answer: The easiest way is to regularly use the Foxhound1 - Tools - Backup Foxhound Database shortcut which will backup and restart the active Foxhound transaction log file, keeping only the three most recent backups and discarding older copies.

You can automate the backup task; see How do I backup my Foxhound database on a regular basis?

Another way to limit the transaction log size is to specify the dbsrv11 -m option in the following command files, to tell SQL Anywhere to truncate the transaction log whenever a checkpoint is performed:

$start_foxhound1_engine.bat
$start_foxhound1_firefox.bat
$start_foxhound1_firefox_debug.bat
$start_foxhound1_ie.bat
$start_foxhound1_ie_debug.bat

By default, those command files are installed here on Windows XP:

C:\Documents and Settings\All Users\Application Data\RisingRoad\Foxhound1

C:\ProgramData\RisingRoad\Foxhound1

See also...
Foxhound Help - Controlling Growth
Foxhound Help - Backup and Restore
How do I keep the Foxhound database file from growing so large?