A newspaper report that the party that props up the minority Conservative government could support Prime Minister Theresa May's Brexit deal, on certain conditions, in a preliminary vote next week sent the British currency vaulting over the $1.31 line.

Broadening dollar weakness with the greenback down 0.7 percent against its rivals also boosted the British currency with one trader saying stop losses triggered in a thin market was a factor behind the dollar's drop.

"Some positions are being unwound in relatively illiquid markets and that is causing the surge in the euro and the pound against the dollar," said a trader at a European bank.

The Sun newspaper said Northern Ireland's Democratic Unionist Party had privately decided to back May's deal in parliament if it included a clear time limit to the "backstop", a provision to prevent routine checks on the Irish land border.

For market watchers, the latest news reports comes at the end of a week capping some positive headlines from both European and British policymakers over Brexit negotiations.

"It shows that the number of lawmakers who want a hard no-deal Brexit is falling fast in parliament and that is positive for the pound in the short term," said Hans Redeker, global head of FX strategy at Morgan Stanley in London.

The pound was trading 0.7 percent higher at $1.3160, its highest level since Nov. 7.

The pound has gained more than 4 percent against the dollar and an equivalent amount against the euro this month with most of the gains coming in the last few days.

For the week, it is up more than 2 percent against the dollar, the biggest weekly rise in fifteen months.

The House of Commons will vote next Tuesday on alternative Brexit plans after rejecting the deal May negotiated with the European Union, a development that pushed the bloc to brace for a no-deal Brexit in two months' time.

Morgan Stanley strategists said in a daily note the pound could rally to as high as $1.45 if May's deal wins parliamentary approval next week, or to as high as $1.37 if there is an extension in the timeline of Britain's exit from the EU.

On Jan. 29, parliament will debate May's proposed next steps and alternative plans lawmakers have put forward. They include delaying Britain's March 29 exit.

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Implied volatility gauges for the pound extended their downward path, with one-month tenors falling to a two-month low on Thursday at around 9.85 vol, nearly half of levels seen in mid-November.

Against the euro, the pound was broadly flat at 86.71 pence.