Thai stocks fell by 1.47% Tuesday on mounting worries that the central bank may impose curbs to slow the baht's rapid appreciation after the currency rose to its highest level against the US dollar since being floated in July 1997.
The benchmark SET index rose in the morning session, breaking through the psychological 1,600-point level, but dived in the afternoon to the day's low of 1,554.27.
After Bank of Thailand governor Prasarn Trairatvorakul eased concerns by saying an emergency meeting of the Monetary Policy Committee is unnecessary, the market pared losses and closed at 1,568.25 points with a brisk volume of 76.1 billion baht.
The baht yesterday ended at 29.32/35 to the dollar.
Mr Prasarn said the strengthening of the baht reflects better sentiment about the economy.
The central bank did not intervene in the foreign exchange market yesterday, saying it would rather monitor the baht trend for a while before deciding if any measures should be taken.
Other benchmark gauges in Asia were mixed, the Philippines dipping as stocks rebounded in Shanghai, Taiwan and South Korea.
Investors were awaiting a parliamentary vote in Cyprus on a bailout plan that is crucial for that country's economy and the broader euro zone.
The EU's decision over the weekend _ to fund a partial bailout of Cyprus by taxing bank deposits _ raised fears of future bailouts in the bloc, possibly shaking the entire financial system.
The euro hit a three-week low of US$1.2882 on Monday but traded at $1.2940 yesterday.
The dollar appreciated against 14 of 16 major peers. US Treasuries were barely changed as the Federal Reserve began a two-day meeting.
Thiti Tantikulanan, the head of capital markets at Kasikornbank, said the baht could retain its upward bias, as capital flows largely to the equity and bond markets.
The support level for the baht this year is tipped at 29, he said.
Foreign holding in local bonds now stands at 800 billion baht, the highest since the Thai Bond Market Association's founding in 1994.
Viwat Techapoonphol, a strategist at Tisco Securities, said profit-taking after the cabinet approved massive borrowing to finance 2 trillion baht worth of infrastructure projects also took a toll on the market.
"The SET index could continue falling to 1,500 points within a month," he said, adding that the upward trend will still remain and that stocks could reach 1,700 to 1,800 points late this year.
Banyong Pongpanich, the chief executive of Kiatnakin Bank, warned of a possible bubble in small-cap stocks with heavy speculative activity but he said the magnitude may be less severe than that of the global stock bubble.
Trading volume of non-SET100 stocks has swelled to 30% of total volume in recent months from 15-20% in the past, he said.
"Stock markets that are dominated by retail investors always have higher-than-normal fluctuation," said Mr Banyong. "The Thai stock market is one of two in the world in which most transactions are contributed by retail investors."
By his reckoning, retail investors account for 63% of the Thai market's trading volume and a little more than half of Taiwan's.
Mr Banyong said there is only a slim chance that foreign investors, who now hold $80-90 billion worth of Thai shares, will dump shares in panic selling, as most of their portfolios are in blue-chip stocks listed in the SET50 and their prices have hardly moved.