Just when the world was about to abandon hope in the euro, the beleaguered currency has regained favour with the foreign exchange markets.

Having toyed with the idea of moving decisively below the $0.80 level, the brave little euro is now heading towards $0.90. It may be tempting to present the turnabout as a triumph for euroland and the ECB. In reality, the euro has been the beneficiary of events on the other side of the Atlantic. If anything, its recovery has occurred in spite of European developments.

Not to put too fine a point on it, the ECB's management of the exchange rate this year was short on credibility and long on aggression. Apart from trying and failing to persuade the markets that the eurozone was enjoying a remarkable phantom economic recovery, the ECB insisted on reacting to every passing inflation release with a rate increase. Despite signs that domestic demand, most particularly domestic consumption, was losing momentum, the ECB persisted with its policy of driving interest rates higher.

To be fair, the bank's first duty is to deliver price stability. However, raising interest rates while the deterioration in the price environment was being driven by global energy price developments, rather than excessive economic activity at home, did little to enhance the ECB's credibility. In effect, the bank found itself chasing an inflation target that was becoming ever more elusive as oil prices spiked higher.

With the bank having no control over oil prices, its insistence on pushing interest rates higher only served to restrain euroland economic growth without reducing inflation pressures. Rather than supporting the euro, the ECB's rate policy managed to undermine the currency by stopping a fragile consumption recovery in its tracks.

Having failed to staunch the euro's losses using interest rate policy, the bank tried to spend its way out of trouble by throwing a few billion dollars of foreign exchange reserves at the markets. This approach, which had the initial support of the other big central banks, was more effective than the interest rate strategy.

By raising the investment risks of selling euros, the ECB put a floor under the value of the currency. It may not have been sufficient to drive the euro higher on the exchanges but it did eliminate the one-way status that the currency had acquired. Traders could no longer sell the euro with impunity.

Having contributed to the collapse and subsequent stabilisation of the euro, the ECB had a very limited role to play in its more recent revival. That took a crash in US equity markets, an inconclusive presidential election, and the farcical toing and froing from court to court as Bush and Gore battled for the White House.

Let's establish the truth before an enthusiastic official starts claiming the euro's ascent as a victory for Frankfurt. The euro was rescued by convincing signs of a slowdown in the US after a remarkable growth run and by unprecedented, dollarerosive political uncertainty. The foreign exchange moves of recent weeks can be most accurately regarded as dollar weakness rather than euro strength.

Admittedly, the currency did gain some support from developments at the ECB with officials becoming uncharacteristically silent. The absence of chat from the sidelines extolling the wonders of the European economy and a pause for thought on the rate front vested the ECB with a new-found credibility.

The bank appears willing to let the euro move ahead without any verbal meddling. More importantly, it has apparently recognised the economic damage inflicted by its aggressive monetary policy and has called a halt to interest rate increases. In doing so, it should allow growth to become self-sustaining and domestically driven. It should also generate further upward momentum for the euro.

Having brought interest rates to a cyclical peak, pressure to loosen monetary policy will intensify over the coming months. The timing of the recovery in the euro means that growth will have to be internally driven next year. The euroland economies got a free ride in 1999 and 2000, thanks to the competitive advantage handed to local businesses by a depreciating currency at a time of strong global economic activity. Next year looks less promising.

This year saw a multi-year growth peak across the globe, with the US doing well, emerging Asia enjoying a post-crisis rebound, while Japanese activity managed to move just beyond stagnation territory. Next year will see a reversal in the fortunes of the export sector, with global demand moderating at the same time that the euro is appreciating on the exchanges. This double whammy will be painful unless policy succeeds in igniting private consumption and investment within the euro area.

After almost a decade of disappointments on these fronts, the omens are turning positive. Overdue income tax reforms in Germany, France and Italy should underpin consumer confidence and give a welcome boost to private consumption.

Although they are welcome, however, fiscal moves alone will not be sufficient to deliver robust growth. Rate cuts are needed if euroland is going to stand a chance of finally overtaking the US in the global growth stakes. The odds are shortening by the day.

Colin Hunt is head of research at Goodbody Stockbrokers