By Miki Anzai
Tokyo, May 28 (Bloomberg) -- The yen fell for a second day against the dollar as a decline in stocks, led by banks, sapped demand for the currency and as concern mounted that lenders have underestimated problem loans.
Japan's currency weakened to 121.09 against the U.S. dollar from 120.65 late Friday in New York, when it fell 0.7 percent. Against the euro, the yen weakened to 104.11 from 103.88 Friday.
``A fifth straight day of declines in (the Nikkei 225 stock average) hurt the yen,'' said Toshiyuki Takamatsu, senior foreign exchange dealer at ABN Amro Bank NV. ``If the Nikkei falls further, traders will sell yen more.'' He expects the yen to slip to 121.50 per dollar at the end of this week.
UFJ Holdings Inc., Japan's No. 5 lender -- formed by the merger of Sanwa bank Ltd., Tokai Bank Ltd., and Toyo Trust & Banking Co. -- shares fell after the bank said it wrote off 1 trillion yen ($8 billion) in bad loans. That's about 1.7 times the size of bad loans it originally planned to get rid of. Mizuho Holdings Inc., the largest bank by assets, also fell.
``Banks' bad debts are more severe than they appear on the surface,'' said Hiroshi Kato, who helps manage 200 billion yen ($1.7 billion) at Ikegin Investment Management Co. in Osaka. ``Banks use different standards to measure their bad debts, which makes it difficult to assess the size of the overall problem.''
Trading volume was below average, as financial markets in London are closed today for the spring bank holiday and in the U.S. for Memorial Day, amplifying swings in exchange rates, traders said.

Fed vs ECB
Helping to push up the dollar was optimism the Federal Reserve's interest-rate cuts this year will boost the world's largest economy.
The dollar strengthened to 85.97 cents per euro from 86.11 in late New York trading Friday, when it finished the week with a gain of more than 2 percent.
``I still can't buy euros aggressively this week,'' said Hiroshi Sakuma, a foreign exchange manager at Barclays Bank Plc.
Traders and investors favor the U.S. currency because they have ``more confidence in the Federal Reserve than in the European Central Bank on handling the economy,'' he added.
Fed Chairman Alan Greenspan indicated in a speech Thursday that the central bank is prepared to reduce the overnight bank lending rate for a sixth time this year.
The U.S. Labor Department releases a jobs report Friday that is expected to show the economy lost more jobs in May, giving the Fed reason to trim interest rates further to sustain the record economic expansion, which began a decade ago, analysts said.
The Fed has so far cut the target rate for overnight loans between banks to 4 percent, a seven-year low.
By contrast, the European Central Bank, after insisting inflation would prevent it from lowering borrowing costs, surprised the market on May 10 by reducing its benchmark refinancing rate a quarter percentage point to 4.5 percent.
The move caught investors unprepared and tarnished the bank's credibility as an inflation fighter as the bank lowered rates even as prices for goods and services had exceeded its target for almost a year.

Poor Communication
Investors and traders are focusing on ECB President Wim Duisenberg and council member Ernst Welteke, who will later today get a chance to make their views known when they testify to the European Parliament in Brussels.
``No comments on euros will disappoint investors, possibly triggering euro sales,'' said Takeo Suzuki, deputy manager for foreign exchange trading at Nomura Securities Co.
ECB policymakers' ``communication is very poor,'' said Jim O'Neill, chief currency economist at Goldman Sachs Group Inc. in London. ``I don't think they know what they're doing.'' Goldman last week lowered its three-month euro forecast to 88 U.S. cents from 98.
Citibank and CIBC World Markets also lowered their forecasts for the euro last week. Citibank now expects the euro to trade at 82 cents in six months, down from the original forecast of 86. CIBC reduced its forecast to 85 cents from 92 by the end of June.
Germany and France, which account for more than half the products and services produced in the 12 nations sharing the euro, have reported less-than-expected first-quarter expansion, with Germany growing 0.4 percent and France slowing to a pace of 0.5 percent. The U.S. economy grew 1.3 percent in the same period.

Intervention Concern
The euro has fallen 3.6 percent versus the dollar since the end of April, becoming the second-worst performing major currency.
It's now almost 2 cents below the level where the ECB bought the currency with other major central banks on Sept. 22 to give it a boost. The ECB subsequently intervened alone on three occasions in November when the euro was between 85 and 87. Each time, the gains didn't last.
Welteke said in an interview in Frankfurter Allgemeine Zeitung last week that the euro's losses have contributed to inflation in the region, fanning speculation the ECB may step in to buy euros. A weakening currency may cause inflation by making imports more expensive.
Currency intervention by the ECB may not help boost the euro, because ``the bank's action will prove that the ECB's surprise rate reduction was a total mistake,'' Barclays Bank's Sakuma said. ``Whenever the currency jumps by intervention, we will all rush to dump euros.''
In other trading, the dollar rose to 1.7761 Swiss francs from 1.7742 in New York. The British pound fell to $1.4202 from $1.4225 Friday.