But are they "big, friendly letters"? And yellowness is rather a misrememberance on my part anyhow!
I guess the towel should do as many of the following as possible:
Protection from Cold
Provides shelter for rest, provided your at the beach with heady sea vapours, or in the desert at night
Can be used to sail
Melee weapon when wet
Protection from noxious fumes, gaze attacks, and some form of concealment when worn on your head
Distress signal
Removing liquids from yourself, if it still seems to be clean enough
Bonus to Bluff or Diplo such that others will be willing to lend/give you any number of practical items (of essentially any value) because you are clearly a man to be reckoned with, as you've battled your way across the land facing liches and dragons and constructs and all other manners of beastie against all odds, and you still have your towel.