* Ireland downgrade pushes euro down toward $1.38
* Dollar index hits highest since May 20
* 2-year US yields jump to highest in 7 months
(Recasts, updates prices, adds quotes, changes byline)
By Jamie McGeever
LONDON, June 8 (Reuters) - The euro slumped against the dollar on Monday, dragged down by another sovereign downgrade for Ireland and giving added support to a U.S. currency already buoyed by surging Treasury yields following Friday's U.S. jobs data.
Ratings agency Standard & Poor's cut Ireland's sovereign credit rating on Monday to AA, its second downgrade in three months and the catalyst for the euro's lurch lower to a near-two week low of $1.3806.
This added to the dollar's widespread strength already bolstered after smaller-than-expected job losses in the United States last Friday raised speculation the U.S. Federal Reserve may lift interest rates early next year, triggering a sharp jump in two-year Treasury yields to a seven-month high.
"It is negative for the euro," said Audrey Childe-Freeman, senior FX strategist at Brown Brothers Harriman, referring to the S&P downgrade.
"The euro was already looking vulnerable this morning (and) the news added to the negative sentiment. It is not a major shock but it is certainly going to weigh on the euro," she said.
The euro fell as low as $1.3806, according to Reuters data, and at 1015 GMT was last down 1.1 percent on the day at $1.3820.
Against the yen, the euro was down 1.1 percent at 136.20 yen .
The dollar index, a gauge of the greenback's value against a basket of six major currencies, was up 0.9 percent on the day at 81.34, its highest since May 20.
On Friday, the dollar index rose 1.6 percent, its best performance since Dec. 19, Reuters data showed.
The dollar slipped 0.1 percent against the yen to 98.54 yen , still close to a one-month high of 98.90 yen on trading platform EBS on Friday.
VIGILANT FED
The dollar was buoyed before Ireland's downgrade as investors focused on improving prospects for the U.S. economy, reversing a trend where the dollar had been sold for higher risk currencies in response to better economic fundamentals.
Market players covered dollar-short positions, exacerbating gains, as many thought the dollar's recent falls were overdone.
The pace of U.S. job losses slowed sharply last month, the strongest sign to date that the recession is diminishing, even as the unemployment rate hit its highest in nearly 26 years.
Two- and 10-year U.S. Treasuries yields hit highest levels since November in Asia on Monday as Treasuries extended losses.
"Payrolls didn't appear as bad as expected, and the Fed's Lockhart said the Fed might start tightening cycle (soon) ... which has prompted sharp dollar buying across the board, together with short-end U.S. yields rising sharply," said Roberto Mialich, FX startegist at Unicredit in Milan.
Atlanta Fed President Dennis Lockhart said on Friday the Fed needs to be "anticipatory" and not wait too long before tightening monetary policy.
With currency movements closely following U.S. bond yields, markets will focus on a slew of Treasuries auctions this week. The U.S. government is scheduled to sell $65 billion in debt including 10-year and 30-year securities.
Meanwhile, sterling fell 0.8 percent to $1.5837 on political uncertainties in the UK.
Britain's Prime Minister Gordon Brown faced a renewed challenge to his leadership on Monday after support for the ruling Labour Party plunged to its lowest level in a century in European elections.