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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, pushing short-term yields to their biggest single-day rises in nearly four years as investors priced in a U.S. interest rate hike by mid-2015.
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 trend is pretty good. Now comes the second-guessing in the market," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida. "It brings concerns that the Fed might look to raise earlier than some people had expected. I don't think anyone should fear the Fed right now."
The Dow and S&P 500 ended at record highs and posted a seventh straight weekly advance.
Traders shifted bets on the Federal Reserve's first round of interest-rate increases to July 2015 from September 2015 before the report.
The jobs report caused the yield on U.S. 2-year Treasuries US2YT=RR to rise to its highest since May 2011, according to Reuters data. 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 Treasury note US10YT=RR was off 14/32 and yielding 2.3047 percent.
The dollar rose against a basket of currencies .DXY to its highest level since March 2009. The dollar also hit multi-year peaks against the euro EUR= and against the yen JPY=. The U.S. dollar index hit a peak of 89.467, up 0.86 percent on the day.
On Wall Street, the Dow Jones industrial average .DJI rose 58.69 points, or 0.33 percent, to 17,958.79, the S&P 500 .SPX gained 3.45 points, or 0.17 percent, to 2,075.37 and the Nasdaq Composite .IXIC added 11.32 points, or 0.24 percent, to 4,780.76.
"Payrolls confirm the strength of the economy, but that strength is reflected in stock prices," said Ronald Sanchez, chief investment officer of Fiduciary Trust Company International in New York
Stock traders balanced the encouraging fundamental strength in the U.S. economy with the prospect of a rate rise.
Financial shares led gains. The S&P financial index .SPSY was up 1 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 0.8 percent.
MSCI's global share index .MIWD00000PUS was up 0.1 percent, while an index of European shares .FTEU3 ended up 1.8 percent as a weaker euro boosted exporters.
Gold XAU= dropped more than 1 percent, suffering from the dollar's strength, while Brent LCOc1 and U.S. crude CLc1 continued their slide.
Spot gold XAU= was down 1.2 percent at $1,190.90 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, Ryan Vlastelica and Dan Bases in New York; Editing by Dan Grebler and Leslie Adler