I've been helping my mom renovate her half bath, and we decided to ditch the towel rod and go for some hooks instead. This is such a great idea, especially in a little bathroom that only requires hand towels. The previous home owners had a 3 foot rod put in a really awkward place. There's no need for a rod that size for hand towels, it looked really dis-proportionate.
Towel hooks are fun too because they come in so many fun varieties. Here's a few different styles I found on the web.