The U.S. dollar rallied versus the yen on Friday after a government report showed U.S. employment fell by far less than expected in August and private payrolls growth was surprisingly strong.

The dollar jumped 1 percent to trade above 85 yen as the data fueled expectations the U.S. labor market is not as bad as feared and helped lift U.S. Treasury securities yields.

These are very nice numbers for the labor market, said Kathy Lien, director of currency research at GFT in New York. It means for the time being, some of the fears of weakness in the U.S. economy may be misplaced.

The dollar rose to 85.22 yen, according to Reuters data, compared with 84.46 earlier. It was last at 85.05, up about 1 percent on the day, moving further away from a 15-year low of 83.58 yen set on electronic trading platform EBS late last month.

The euro briefly extended ground against the dollar to hit a two-week high as U.S. stock futures gains, boosting appetite for risk. The euro zone single currency was last at $1.2837, up 0.1 percent.

While the jobs report might mitigate fears of a double-dip recession, some analysts cautioned that the U.S. economy is still in for a slow recovery.

Just as trading on the bad U.S. data recently was overdone, I think sentiment on this week's positive reports is also going to be overdone, said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. You have a lot of people unemployed, so it's a long way back to normal.

(Additional reporting by Nick Olivari and Steven C. Johnson; Editing by Chizu Nomiyama)

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