Dollar, stocks gain after stronger-than-expected U.S. jobs data

NEW YORK (Reuters) - An unusually strong U.S. jobs report lifted the dollar to a five-and-a-half-year high against a basket of currencies on Friday and drove stocks higher, led by financial shares.

U.S. bond prices dropped, with the yield on U.S. two-year Treasuries hitting the highest level since May 2011, as investors priced in a U.S. interest rate hike by mid-2015.

The Labor Department data showed U.S. employers hired more workers in November than during any month in nearly three years. Non-farm payrolls surged by 321,000, the most since January 2012 and topping forecasts for 230,000 new jobs. The unemployment rate held steady at a six-year low of 5.8 percent.

"It is unequivocally bullish on the U.S. economy," said Anthony Valeri, fixed-income strategist at LPL Financial in San Diego. "We'll need more evidence, but it definitely contradicts the low-yield environment we have been in."

U.S. short-term interest-rate futures contracts dropped as traders bet the Federal Reserve would raise interest rates in July 2015 - earlier than formerly thought.

The jobs report caused the yield on U.S. two-year Treasuries to rise nearly 9 basis points. The yield curve flattened, with the differential between the five-year note and the 30-year bond falling to its lowest level since January 2009.

The benchmark 10-year U.S. Treasury note was down 20/32 in price, with the yield at 2.326 percent.

The dollar rose against a basket of currencies <.DXY> to its highest level since March 2009. The dollar climbed to its highest level against the yen since late July 2007.

On Wall Street, the Dow Jones industrial average <.DJI> rose 51.53 points, or 0.29 percent, to 17,951.63, the S&P 500 <.SPX> gained 2.11 points, or 0.1 percent, to 2,074.03, and the Nasdaq Composite <.IXIC> added 8.60 points, or 0.18 percent, to 4,778.04.

Stock traders balanced the encouraging fundamental strength in the U.S. economy with the prospect of a rate rise.

Financial shares led gains, with the S&P financial index <.SPSY> up 0.9 percent, with higher interest rates expected to boost earnings in the sector. Utilities, a dividend play, lost ground as Treasuries yields rose. The S&P utility index <.SPLRCU> was down 1.1 percent.

MSCI's global share index <.MIWD00000PUS> was up 0.2 percent, while an index of European shares <.FTEU3> ended up 1.8 percent as a weaker euro boosted exporters.

The rally in stocks follows heavy declines on Thursday after the European Central Bank said a decision about further stimulus would be made next year.

Gold dropped nearly 1 percent, suffering from the dollar's strength, while Brent and U.S. crude continued their slide.

Spot gold was at $1,191.05 an ounce. Brent crude fell 57 cents to settle at $69.07 a barrel, while U.S. crude oil futures dropped 97 cents to settle at $65.84.

(Additional reporting by Michael Connor in New York; Editing by Dan Grebler and Leslie Adler)

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