Dow Overcomes the Negatives

"Underlying this is the message that capital is very mobile and hot money rushes into a country but rushes out even faster," says Marc Chandler, currency strategist at Brown Brothers Harriman and a RealMoney.com contributor. "It distorts prices when it rushes in [and] fuels equity bubbles and inflation. It complicates the management of the economy, because it is fueled by speculators rather than real long-term investors."

Treasury Secretary Paulson and Fed Chairman Ben Bernanke and half the U.S. Congress can go to China, but the Thai mistake Tuesday sends the biggest message to the Chinese, and a setback to hopes for revaluation of the yuan, says Chandler. Why would China, the largest exporter to the U.S., revalue the yuan and subject its economy to all that speculative hot money? (After the close, the Treasury Department released its semiannual foreign-exchange report, which declined to name China a formal currency manipulator, a development that may prompt more anti-China rhetoric -- and possibly legislation -- in Congress.)

The Thai story also may once again raise awareness about risk appetite, says Axel Merk, manager of the Mark Hard Currency Fund. "Instances like this will increase volatility in the market in general, and it could cause investors to trim down the carry trade," says Merk.

The carry trade has been wildly popular lately. It is the trade that everyone is afraid not to put on. It's just too easy. Investors borrow money in countries with low rates, like Japan, and invest it in higher-yielding currencies. Such a trade has been virtually given the green light by a Federal Reserve on pause and a Bank of Japan that seems fearful of roiling world financial markets. The Bank of Japan left its overnight benchmark rate rates steady at 0.25% Tuesday.