Dollar rallies as jobs growth spurs rate hike expectations

NEW YORK (Reuters) - The dollar jumped to an 11-1/2-year high against a basket of currencies on Friday as robust U.S. employment growth fueled expectations that the Federal Reserve was closer to raising interest rates.

The euro fell below $1.09 for the first time since September 2003. It was last at $1.0862, off 1.50 percent for the day.

The dollar accelerated after the government reported that U.S. nonfarm payrolls grew by 295,000 in February, exceeding expectations of 240,000 new jobs. The unemployment rate fell to a more than 6-1/2-year low of 5.5 percent.

"We feel the economy is in a position for the Fed to begin normalizing policy," said Sam Bullard, senior economist at Wells Fargo Securities in Charlotte, North Carolina. "We think it is on the path to make a rate change in June."

The dollar index <.dxy>, which measures the greenback against six major currencies, climbed more than 1 percent to 97.726, the highest level since September 2003, according to Thomson Reuters data.

U.S. interest rates futures signaled that investors were placing more bets the Fed might raise rates this summer, though they have not fully priced in such a move until late 2015.

"Markets are pricing in something less dovish," said Nick Verdi, currency strategist at Standard Chartered Bank in New York.

U.S. bond yields, relatively high in comparison to European rates and a key attraction for foreign investors, also rose sharply after the unexpectedly strong employment report.

The euro has been in a long slide and slipped below $1.10 on Thursday, when the European Central Bank set a Monday start for its 1.1 trillion euro bond-buying program, designed to lower euro zone interest rates and spur growth.

The dollar was last up 0.50 percent against the yen , to 120.72 yen, while the British pound lost 1 percent against the dollar and last hovered just over $1.50.

The 30-year Treasury fell sharply in price, which lifted its yield to 2.8703 percent, a high not seen in more than two months.

(Reporting by Michael Connor in New York; Editing by Lisa Von Ahn and Leslie Adler)