Dollar rallies on jobs data, hits 13-year peak against yen

A cashier counts euro banknotes in Vilnius, Lithuania.
Ints Kalnins | Reuters

The U.S. dollar rallied to a 13-year peak against the yen and rose sharply against the euro on Friday after data showing U.S. job growth accelerated in May, bolstering the case for an interest rate hike as early as September.

Nonfarm payrolls increased 280,000 last month, the largest gain since December, the Labor Department said. Economists polled by Reuters had forecast payrolls rising 225,000 last month.

While the unemployment rate rose to 5.5 percent from a near seven-year low of 5.4 percent in April, that was because more people entered the labor force.

The increase in average hourly earnings took the year-on-year gain to 2.3 percent, the largest rise since August 2013. The wage growth indicated that U.S. inflation was moving closer to the Fed's 2 percent target, analysts said.

Who's to blame for market volatility?

After the release of the data, interest rate futures traders bet on a 52 percent of a rate hike in October. But some currency market players thought the figures increased the likelihood of a Fed hike in September.

"The market isn't pricing a high enough probability of September," said Aroop Chatterjee, currency strategist at Barclays in New York. "We think that pricing will have to change as this data is reflecting."

Pointing to data on compensation, Mike Meyer, vice president of EverBank World Markets in St. Louis, said "This higher wage growth definitely puts, in my opinion, a September rate hike back in play."

The dollar rose more than 1 percent against the euro, yen, and . The greenback hit 125.740 yen, its highest level in roughly 13 years. The euro turned sharply lower after rallying earlier this week.

The Fed's first interest rate hike is expected to boost the dollar by driving investment flows into the United States.

"The concerns on the dollar side have certainly diminished," Chatterjee said.

New York Fed President said in a speech Friday that an interest rate hike later this year appropriate.

Read MoreGreek crisis brings out dollar bulls (cautiously)

The euro was last down 0.74 percent against the dollar at $1.1146 after hitting a more than two-week high of $1.138000 on Thursday. The dollar was last up 0.95 percent against the yen at 125.63 yen. The dollar was last up 0.53 percent against the franc at 0.9401 franc.

Read MoreFed's Brainard: Not seeing significant Q2 bounce

The dollar index, which measures the greenback against a basket of six major currencies, was up about 1 percent at 96.33.