Dollar gains, U.S. stock futures drop after U.S. jobs data

LONDON (Reuters) - The dollar strengthened against the euro, U.S. and euro zone government bond yields rose and U.S. stock index futures fell on Friday after above-forecast U.S. jobs data that bolstered the prospect of a Federal Reserve interest rate in September.

Non-farm payrolls increased by 280,000 in May, beating forecasts of economists polled by Reuters for a rise of 225,000. The jobless rate, however, crept up to 5.5 percent, against expectations it would hold steady at 5.4 percent.

Economists polled by Reuters had forecast payrolls would increase by 225,000 in May and the unemployment rate would stay at 5.4 percent.

The dollar extended gains against a basket of currencies <.DXY> after the data. The euro fell as low as $1.1077 from around $1.1220 just before the numbers were released. It last traded at $1.1100, down 1.3 percent on the day.

U.S. stocks index futures initially fell before paring losses but remained in negative territory, suggesting Wall Street would open lower.

Yields on 10-year U.S. Treasuries hit their highest since October at 2.44 percent before pulling back 2.41 percent, up 10 basis points on the day.

In Europe, benchmark German 10-year Bund yields rose as high as 0.929 percent, up 9 bps on the day and just shy of an eight-month high of 0.998 percent hit on Thursday.

"Yields are higher across the board, especially so at the belly as investors are clearly coming around to the realization the Fed will almost surely raise rates in 2015," said Dan Greenhaus, chief strategist at BTIG in New York.

(Reporting by London Markets team, writing by Nigel Stephenson Editing by Jeremy Gaunt)