* Dollar up sharply against yen, euro * U.S. jobs gains of 288,000 smartly top forecasts * British pound backs away from near 5-year peak (Adds dollar gains, comments; changes byline, dateline; previous LONDON) By Michael Connor NEW YORK, May 2 (Reuters) - The dollar shot up on Friday, rising against the yen, euro and other major currencies on buying driven by surprisingly strong hiring in April that took America's unemployment rate to a 5-1/2-year low.
Government data, including a nonfarm payrolls surge of 288,000 far above Wall Street forecasts of 210,000, bolstered optimism about the U.S. economy and suggested a possible rebound in second-quarter economic activity.
April's U.S. jobless rate was 6.3 percent, down 0.4 of a percentage point, and the lowest since September 2008.
"This keeps the Fed on track for tapering and for the first interest rate hikes in 2015," said Anthony Valeri, investment strategist at LPL Financial in San Diego.
The labor reports did include a worrisome decline in the labor force participation rate but overall pointed to economic expansion suggested by other recent upbeat data, Valeri and other strategists said.
"People will take it as support, along with the housing numbers, that the U.S. economy is back on track," said Shaun Osborne, currency strategist at TD Securities in Toronto. "This should set up the dollar for gains for the rest of today's session." The dollar index, a composite of six currency pairs, was up a touch just before the U.S. labor reports but jumped more than 25 basis points quickly and was up 0.38 percent at 79.827 in mid-morning New York trade.
On Thursday, the index fell to 79.414, its lowest since April 11, partly on anxieties that Friday's jobs report might fall short of expectations and discourage buying of greenbacks.
The dollar rose 0.45 percent against the yen to 102.79 yen .
The euro was down 0.38 percent against the dollar at $1.3815.
British sterling, which hit a near five-year high of $1.6921 on Thursday, was down 0.38 percent against the dollar at $1.6830 .
Major currencies showed limited reaction to latest developments in Ukraine, where government forces launched an operation to retake Slaviansk, pro-Russian separatists holding the town in eastern Ukraine said on Friday.
(Editing by Nick Zieminski)