The forces suppressing the long-suffering euro look set to abate, according to a research paper published by the International Monetary Fund.

The paper attributes the weakness of the euro - which has lost a quarter of its value against the dollar since its launch in 1999 - to a combination of the surge in global equity prices and portfolio reallocation following the euro's launch.

Guy Meridith, the IMF economist who prepared the report, argues that these two influences should fade, enabling the euro to regain ground.

A revival in the euro, he argued, would also allow the European Central Bank to cut interest rates more vigorously.

The report says the euro was handicapped by the surge in global equity prices, which raised market capitalisation relative to gross domestic product to unprecedented levels in the US. Higher equity prices boosted both consumption and investment. Higher investment then produced a rise in productivity.

Although eurozone stocks rose in tandem with US stocks, the impact on the US economy was greater, the report argues.

The bull market in shares was led mainly by new economy shares, which are more important in the US than other economies. Furthermore, market capitalisation in the US is much larger relative to GDP than in other countries.

The second drag on the euro came from portfolio shifts generated by the introduction of the euro.

Financial institutions within the eurozone found that assets held in other eurozone states were now classified as domestic assets. This freed up funds for investment in other currency areas including the US, and thus led to selling of the euro. Financial services reforms in some eurozone states, allowing pension funds to increase the share of assets held overseas, have also hurt the euro.

Finally the report cites the explosion of bond issuance by institutions outside the eurozone. Many issuers merely sought to establish a presence in the new eurozone capital market and reports suggest that a significant proportion of the funds raised were then transferred back into the domestic currency of the borrowers.

Both of these main factors depressing the euro, the report argues, should now go into reverse, "creating scope for some reversal of euro weakness".

Portfolio reallocations should have been exhausted, the report suggests, while the partial correction in equity markets should help the euro recover.