* US jobs data knock euro from 2-1/2-year peak vs dlr
* U.S. jobs increase more than forecast
* Wage rise encourages hopes for better economic growth
NEW YORK, March 7 (Reuters) - The dollar climbed on Friday, boosted by an unexpectedly large jump in U.S. jobs growth that set off enough buying to lift the greenback from a four-month low.
The U.S. dollar index, a composite of six currency pairs which earlier on Friday had hit a bottom of 79.433 last seen on Oct. 29, reversed course after the release of February's U.S. employment data, touched a high of 79.847, and was ahead 0.07 percent for the day at 79.710 late on Friday.
The dollar was up 0.25 percent against the yen to 103.325 yen in late New York trading and little changed against the euro, which earlier had hit a 2-1/2 year high against the dollar on signs the European Central Bank's balance sheet was shrinking.
Traders shifted gears when the U.S. Labor Department reported that America's employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January. Forecasts had been for gains of about 149,000, according to a Reuters poll.
The unemployment rate rose to 6.7 percent from a five-year low of 6.6 percent but the reports from Washington eased widely held worries that the U.S. economic recovery was stuck in a soft patch.
"It is stronger than expected on several fronts. That the numbers came even while weather was bad shows the underlying strength of the economy," said currency strategist Camilla Sutton at Scotia Capital in Toronto. "It is good for the U.S. dollar."
The data portraying job market improvements also meant the Federal Reserve was unlikely to slow its winding down of its bond-buying stimulus program now running at $65 billion a month, according to Sutton and other institutional investors.
Average hourly wages during February rose by 9 cents, a result applauded by commentators as a possible sign of building demand for workers.
"We know that we need stronger wage growth, stronger investment spending, and strong job growth if growth in 2015 has a chance of matching 2014," said currency and rates analyst Eric Green at TD Securities. "The report today leaned in that direction. It did no more than lean, but that is enough to push rates higher and flatter."
The U.S. dollar also rose against the Canadian dollar, which was stung by a data release showing an unexpected loss of Canadian jobs last month.
In earlier European trade, the euro hit a 2-1/2 year high of $1.3915, its highest since October 2011. The euro has made broad based gains after the ECB on Thursday decided to stand pat on policy and held off from fresh monetary stimulus.
"The ECB was quite disappointing to a lot of euro bears," said Yujiro Gato, currency strategist at Nomura, London.
The euro's gains accelerated on Friday after data from the ECB showed banks were set to repay a big chunk of its emergency 3-year loans next week. That repayment to the ECB shrinks its balance sheet size at a time when both the Federal Reserve and the Bank of Japan are expanding theirs by buying bonds.
The repayment of loans leads to a drop in excess liquidity, a factor which saw money market rates rise and boost the euro's allure.
Overall, investors are turning increasingly bullish about the euro after President Mario Draghi told a news conference that economic conditions in the region did not require a shift in monetary policy.