The yen gained against the dollar and higher-yielding currencies for a second day on Tuesday as escalating concerns about credit turmoil prompted investors to cut back on risky positions.

Comments by U.S. Treasury Secretary Henry Paulson on Monday failed to calm the financial markets, sending stocks throughout the globe lower and dragging on the dollar, traders said.

A lot of people got disappointed with Paulson on Monday because they were expecting some sort of clear plan to restore confidence in the credit markets, said Brian Taylor, a senior currency trader at M&T Bank in Buffalo, New York. He didn't provide that, leading to a reversal of carry trades. The yen is up across the board.

Paulson said on Monday the U.S. Treasury was close to brokering a mortgage aid plan to help troubled borrowers avoid loosing their homes through foreclosure. He also said troubles in the housing market will take some penalty on U.S. growth.

By early morning in New York, the dollar was down 0.6 percent at 109.75 yen. The high-yielding Australian dropped 1 percent to 96.26 yen.

The euro was up 0.5 percent at $1.4743, with traders saying the move higher was accentuated by the break through key stop-loss levels.

The Canadian dollar fell sharply after The Bank of Canada cut its overnight interest rate by one-quarter point to 4.25 percent on Tuesday, saying it expected more global financial market difficulties linked to U.S. subprime woes.

The U.S. dollar jumped to a near 11-week high of C$1.0144, up from C$1.0050, where it was shortly prior to the announcement.

Market attention now turns to the Bank of England rate decision due on Thursday, with analysts saying chances of a rate cut have risen since the Bank of Canada move.

Sterling fell against the U.S. dollar after Canada's move to $2.0594, down 0.3 percent on the day, from around $2.0630 earlier.

The Federal Reserve is expected to cut U.S. rates by 25 basis points next week, with some forecasting a 50-basis-point reduction.

Liquidity in some credit markets is now at its tightest in years, as banks' risk aversion and reluctance to lend is exacerbated by a seasonal lack of liquidity.

One-month interbank lending rates in the euro (Euribor) rose to near seven-year highs on Tuesday, while one-month sterling London interbank rates (Libor) fixed at a 9-year high.

Credit worries also weighed on financial stocks, contributing to a 1 percent fall in the FTSEurofirst equity index and adding to the risk-averse mood in the market. U.S. stocks also headed lower at the opening.

We are getting into the period now when liquidity is very much at a premium and the news flow on the turmoil in the credit market does not seem to be abating, said Kamal Sharma, currency strategist at Bank of America.

Euro-zone data on Tuesday showed producer price inflation rising more than expected in November, suggesting that the European Central Bank will leave rates on hold this week at 4.00 percent.

Investors are awaiting for Friday's key U.S. payrolls data, which is expected to show employers added 75,000 jobs in November.

(Reporting by Vivianne Rodrigues; Editing by Tom Hals)

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