* Dollar/yen hits highest level since August 2009
* Euro falls to three month low against the dollar
* U.S. jobs data well above expectations
NEW YORK, March 8 The dollar touched a fresh 3-1/2-year high against the yen and a three month high against the euro on Friday, buoyed by a report showing U.S. employers stepped up hiring in February, pushing the unemployment rate to a four year-low.
The report, suggesting the economy has developed enough momentum to withstand the blow from higher taxes and deep government spending cuts, fueled speculation the U.S. Federal Reserve will tone down its ultra-loose monetary policy sooner than anticipated. .
Nonfarm payrolls surged by 236,000 jobs last month, the Labor Department said on Friday, handily beating economists' expectations for a gain of 160,000. The jobless rate fell to 7.7 percent, the lowest since December 2008, from 7.9 percent in January.
The euro fell against the dollar, erasing gains, from Thursday when European Central Bank (ECB) President Mario Draghi gave less dovish policy signals than expected.
"Progress in the labor market is unmistakable," said Joseph Trevisani, chief market strategist at WorldWideMarkets, Woodcliff Lake in New Jersey. "The equity rally will be aided by the improving labor economy and the dollar should find firm support in the good jobs numbers."
Against the yen, the dollar climbed as high as 96.54 yen, the highest level since August 2009. It was last at 96.26 yen, up 1.5 percent, its biggest one-day gain since Feb. 11 at current prices. .
The yen seems likely to remain under pressure as investors, looking past the Bank of Japan's (BOJ) decision to hold policy steady on Thursday to its April meeting, expect new officials to take aggressive action to beat deflation.
If the BOJ expands its stimulus programme next month that could open the way for a test of 100 yen, said Ronald Ip, Director of Wealth Solutions Group for HSBC Global Markets in London.
Traders reported a four-week dollar/yen put transaction in the options market, giving the buyer the right to sell the dollar at 100 yen in four weeks' time.
Geoffrey Yu, currency strategist at UBS In London, said any pullback in the dollar, especially against the yen, could be a good buying opportunity.
The euro rose 0.6 percent against the yen to 124.99 yen , with the session peak at 125.95 yen, the highest level since Feb. 13.
It fell against the dollar on Friday, a day after the ECB president gave no indication he would cut interest rates further in the euro zone. The euro was last down 0.9 percent at $1.2984 with the session low of $1.2955, the lowest since Dec. 11, using Reuters data.
Investor expectations of future rate cuts, however, remained a focal point, reinforced by comments from International Monetary Fund head Christine Lagarde, who said the ECB should lower rates.
Morgan Stanley analysts said in a note to clients the downward revision of (euro zone) growth forecasts and the below-target inflation forecast continued to provide the ECB with flexibility for future action on interest rates.
They said any rebound in the euro against the dollar was an opportunity to sell for an eventual decline towards $1.27/1.28.