Intervention to prop up the value of the euro has been successful, despite widespread scepticism beforehand about whether it could achieve this goal.

Prior to the intervention the euro had been seen as a one-way bet - all a trader had to do to make money was sell the euro. It could not have been simpler. Now those in the currency markets are having second thoughts. This is a very different game from the currency crisis in 1992 and 1993. Compared to the Bank of England and the Central Bank of Ireland, the firepower of the world's three largest central banks is such that no investment house wants to take them on. At least in the short term, the perception that the value of the euro is heading in one direction only has vanished, and as result the currency may well have found a floor around $0.85 or $0.86.

It is not clear when intervention will occur again, but analysts agree that if the currency starts to fall the central banks will re-enter the market. They may wait a day or two after any decline to catch the currency on the rebound as traders take profit. That was the strategy last Friday when the currency was bouncing slightly after hitting its lowest point the previous Wednesday. However, it would be wrong to blame speculative traders for the euro's decline. As Dr Dan McLaughlin, chief economist at ABN Amro, points out, The Chicago Futures Exchange data identify investment flows as a key factor.

The data provide an indication of the extent of non-trade or investment flows - in other words, speculative positions. And it would appear that in the weeks leading up to the intervention there were only very limited speculative monies in the market.

If there had been more speculation, it is likely that the euro would have rallied far further than it did. This is what happened in the spring, following the euro rally - as it began to fall back traders bailed out quickly, and a swift decline in the currency followed.

Massive portfolio outflows from the euro zone into the US and elsewhere have had a far larger impact. Almost €220 billion has flowed into overseas equities and bonds in the first five months of this year, compared to €126 billion in the same period in 1999. In contrast, in the first five months there was only €4 billion of inflows, leading to a chronic deficit. With flows of that size it is not surprising that the euro has fallen.

Flows of money out of the euro zone have also been fuelled by moves by European pension funds and insurance companies, since the euro came into operation, to diversify their holdings, in the same way as Irish funds have been selling their stocks of Irish equities. This will have to come to an end, but only when the funds decide that their holdings are sufficiently diverse. That could be by the end of this year or it could take another year, depending on who you listen to.

The other major flows are foreign direct investments, which are more volatile than the investment flows; most of these have been made up of European banks buying American firms. In the first five months, euro zone firms spent €117 billion buying companies outside the euro zone. In the last few months, both CSFB and UBS have bought US investment houses, and that has undermined the euro as they have had to buy dollars to fund these purchases.

However, earlier this year the Vodafone purchase of Mannesmann led to a euro rally on the foreign exchanges. As European assets become cheaper it is likely that many more US firms will see value and will arrive in the market. Already this year almost €250 billion has flowed in this way, lending some support to the euro.

The outflows are also likely to fall back over the medium term - after all there are few US investment houses left. "The only large American investment banks left are Bear Sterns and Lehmans, so its simply not possible for one a month to be bought," Dr McLaughlin points out. He adds that the level of outflow is equivalent to about 6 per cent or 7 per cent of euro zone gross domestic product, which is unsustainable by historical standards. When that does stop it is likely to lend further support to the euro.

The other factor identified by investors to explain the dominance of the dollar is the different relative growth stories on either side of the Atlantic. In recent years the pace of US growth has far exceeded that in the euro zone and it has been done with a low level of inflation, leading to large productivity increases - the so-called new economy. Europe on the other hand has only been recovering for little more than a year, and already there are worries that growth in Germany and possibly Italy may have peaked. Nevertheless, most forecasters expect the European economy to grow marginally more quickly than the US next year, perhaps 3.5 per cent against 3.2 per cent.

So far that has not been enough to be positive for the euro, but much will depend on what actually happens. Even if euro zone growth is ahead of the US it may not be as positive as some people are hoping for.

This is mainly because - as the ECB president Mr Wim Duisenberg has pointed out - there is not much evidence of a new economy in Europe. Even if growth picks up, productivity is likely to be low. The 3.5 per cent growth in Europe is above the long-term trend, while 3.5 per cent growth in the US may actually be below the long-run sustainable rate.

The only way for this to be reversed is for productivity in Europe to increase seriously. Either the euro zone needs to attract more of the new economy industries and to undergo some of that much-hyped structural change or it needs to allow in far more immigrants and preferably young skilled ones, as America has always done.

Another factor is commodity prices and particularly oil, which is priced in dollars. As a result, lower oil prices would be negative for the dollar.

Some analysts also point to the varying interest rate differentials in the different zones. US interest rates are currently 6.5 per cent, compared with 4.5 per cent in the euro zone. However for a long time Japanese rates were zero and the euro did not appreciate against the yen. It seems that rate differentials in themselves are not important; rather it is the strength of the underlying economy that attracts investors. Thus higher European interest rates that kill off growth will weaken the euro, but higher interest rates against the background of a rapidly expanding economy will be welcomed. Getting that balance right is perhaps one of the ECB's hardest jobs.