The U.S. dollar rose to a two-week high against the yen and the euro rallied on Friday after a report showing the U.S. economy added the most jobs in five months in July boosted investor appetite for risk.

The safe-haven Japanese currency fell sharply across the board, losing more than 1 percent against the euro, Australian, Canadian and New Zealand dollars.

Non-farm payrolls rose 163,000 last month, the Labor Department said, beating economists' expectations for a 100,000 gain.

Analysts said the data could dampen expectations for a third round of quantitative easing by the Federal Reserve next month, but the increase in the unemployment rate to 8.3 percent will probably keep expectations of additional monetary stimulus intact.

"Overall, the greater than expected increase in payrolls should win the day, and act as some support to risk assets even if it does diminish the chances of QE3 as early as September," said Andrew Grantham, economist at CIBC World Markets in Toronto.

The dollar rose as high as 78.77 yen, the strongest level since July 20. It was last up 0.6 percent at 78.70 yen.

The euro rose 0.8 percent to $1.2277 and rallied 1.4 percent to 96.61 yen.

The euro zone common currency also gained as investors took a more optimistic view of the European Central Bank's stance on sovereign bond buying.

The ECB said on Thursday it will draw up plans in the coming weeks to make outright purchases to stabilize euro zone borrowing costs, disappointing hopes for quick action to address the debt crisis.

"There are a lot of people out there taking a reassessment of what Draghi said yesterday," said Lutz Karpowitz, currency strategist at Commerzbank. "It's rather difficult to believe they will really refrain from stepping into the market."