The U.S. dollar extended gains on Monday, hitting its highest level in more than four months as investors gauged what last week’s job data and a continued oil price rally could mean for monetary policy.

The ICE U.S. Dollar Index DXY, +0.29% , which measures the buck against six rivals, gained 0.2% to 92.762, reaching its highest level since late December. The benchmark last week rose 0.2%, logging a fourth straight weekly advance. The broader WSJ Dollar Index BUXX, +0.47% , which also included emerging-markets currencies, was up 0.2% at 86.32.

The euro EURUSD, -0.28% fell to $1.1924 from $1.1963 late Friday in New York, earlier touching its lowest since late December.

The British pound GBPUSD, -0.02% , meanwhile, was slightly stronger at $1.3558, versus $1.3532.

The Japanese yen USDJPY, +0.41% ticked up slightly, with the buck buying ¥109.04 compared with ¥109.12 on Friday.

The Canadian dollar USDCAD, +0.52% and Mexican peso USDMXN, +2.81% were weaker on Monday as yet another round of talks about the North American Free Trade Agreement are kicking off in Washington, D.C. Canada, Mexico and the U.S., the three members of the trade pact, are expected to reach a deal in principle this month.

One U.S. dollar last fetched C$1.2892, up from C$1.2847, as well as 19.4804 pesos, up versus 19.2666 pesos last Friday.

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What is driving the market?

The U.S. dollar started the week of on stronger footing, while the U.K. was out for a May banking holiday, which somewhat limited trading volumes. The greenback’s main rival, the euro, was dragged lower on Monday, following unexpectedly weak German factory orders in March.

Additionally, a rally in oil prices was seen as potentially boosting U.S. inflation. U.S. crude oil US:CLM8 topped $70 a barrel for the first time since 2014 on Monday as traders became more convinced President Donald Trump would abandon the Iran nuclear deal and reimpose sanctions on the country. That would limit Iran’s oil exports and tighten global supply. As energy is a big part of headline consumer prices, a continued surge in crude prices could further lift U.S. inflation.

Higher inflation could persuade the Federal Reserve to raise interest rates at a faster pace than currently priced into the dollar’s level. The central bank’s dot plot points at three total hikes this year, including one completed in March.

Friday’s U.S. jobs report, which included an unemployment rate of 3.9%, the lowest level since 2000, also sparked speculation that the labor market was close enough to full capacity that wage inflation soon had to pick up.

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What are strategists saying?

“Market participants realize that the recent increase in the commodity’s price—and possibly more gains in light of the U.S. vs. Iran dispute on the nuclear deal—will have to take their toll on U.S. inflation,” said Konstantinos Anthis, head of research at ADS Securities, in a note.

“Higher domestic inflation would be just what the Fed needs in order to tilt towards 3 additional rate increases in 2018. Furthermore, the tighter labor market conditions—as seen on Friday’s data—are also expected to push wage growth higher in the medium term. Higher energy prices and stronger wage growth is almost an ‘one-way road’ to higher inflation which would leave no option to the Fed other than raising rates more aggressively—which explains why the greenback stays on an upward trajectory,” he added.

“With renewed interest in dollar buying, we could see dollar-yen attempting a move towards the key ¥110 regions,” said Viash Sreemuntoo, corporate trader at online platform XE.com, adding that it won't be a straight line of appreciation in the pair.

What else is in focus?

Speeches from Fed officials on Monday revealed little about the path of rate increases.

Richmond Federal Reserve President Thomas Barkin, in his first public speech, said that he thought the central bank should continue to raise interest rates.

Chicago Federal Reserve Bank President Charles Evans and Dallas Fed President Robert Kaplan were both scheduled to speak at a conference in Florida Monday afternoon.

Meanwhile, the Federal Reserve said consumer credit in March grew at a seasonally adjusted annual rate of 3.6%, or $11.6 billion, to mark the slowest gain since September, well below expectations.

See:MarketWatch’s economic calendar

In other assets, U.S. stocks, including the Dow Jones Industrial Average DJIA, -1.35% , closed modestly higher.

U.S. Treasury yields were little changed, and the 10-year note TMUBMUSD10Y, 0.682% last yielded 2.9492%.

—Anora Gaudiano contributed to this report