* Nonfarm payrolls increase 204,000 in October
* Expectations grow Fed may start cutting stimulus in December
* Euro falls after shock ECB rate cut, French S&P downgrade
NEW YORK, Nov 8 (Reuters) - The dollar rallied across the board on Friday after a report showed an unexpected acceleration in U.S. job growth in October, lifting expectations the Federal Reserve may start scaling back massive stimulus before the end of the year.
Employers added 204,000 jobs last month, the Labor Department said, handily beating the consensus forecast for an increase of 125,000. The report suggested the economy was on a firm footing and that a partial government shutdown had less of an impact on the economy than feared.
A cutback in Fed stimulus, at a time when the European Central Bank and Bank of Japan are in easing mode, will boost the dollar’s yield appeal. The dollar has fallen in recent weeks on speculation the Fed may not start reducing its $85 billion per month bond purchases until next year.
“It’s an impressively strong jobs number in the face of a government shutdown and underlying weakness in the U.S. economy. This number has totally re-written the outlook for the U.S.,” said Richard Franulovich, senior currency strategist at Westpac in New York.
“I have been dismissive of a December taper from the Federal Reserve, and now it looks like a possibility.”
The dollar index, which tracks the greenback versus a basket of six currencies, rose 0.5 percent to 81.245, with the peak on the day a near two-month high of 81.482.
The euro fell 0.5 percent to $1.3356, having hit a session low of $1.3316, according to Reuters data, still above a seven-week low of $1.3295 struck on Thursday.
Negative sentiment on the euro grew after the European Central Bank shocked investors by cutting the interest rate on Thursday and Standard & Poor’s downgraded France’s credit rating to AA from AA+.
Money markets and the currency options market are suggesting the euro will grind lower in the near term as it loses its yield advantage over other major currencies.
Citigroup put a sell recommendation, targeting a drop to $1.3050.
“Given the ECB’s view of a prolonged period of low inflation, any further slowing in CPI will raise the threat of negative deposit rates, which will be a big negative for the euro,” said Chris Turner, chief currency strategist at ING.
Against the yen, the dollar rose 0.9 percent to 98.99 yen, having climbed to a session peak of 99.21 yen. On Thursday, the dollar hit a near seven-week high of 99.41 yen.
The dollar was on track for its second straight weekly gain against the euro, with the latter falling 0.9 percent this week. Against the yen, the dollar was headed for a gain of 0.3 percent, also a second week of advance.
Some analysts said the details of the jobs report still suggest worries in the labor market, such as the falling labor force participation rate, which has limited the dollar’s rally.
“The payrolls are a nice surprise but the Fed is in no condition to restart tapering talk having just reversed themselves seven weeks ago,” said Joseph Trevisani, chief market strategist at WorldWideMarkets, in Woodcliff Lake, New Jersey.
After the jobs data, U.S. short-term interest rate futures suggest traders are expecting a 47 percent chance the Fed will hike rates in April 2015 and a 55 percent chance of a rate hike in June 2015.
On Thursday, the April 2015 fed funds contract suggested a 43 percent chance of a rate hike and the June 2015 contract a 51 percent chance.