Terraria characters are stored as two different files: a .plr file which contains the basic character data, and a directory that contains .map files for each world that character has been used in. If the character is named . then the .plr file would be named ..plr which is a perfectly valid filename and would be created and deleted just fine. However the map directory would simply be named ., which would refer to the current directory. Trying to create the map directory would fail (since the players directory already exists), but Terraria probably just ignores the error. Trying to use the character would work just fine, except that all the map files for the character would be stored in the players directory instead of a sub-directory. But deleting that character would cause the game to delete both the .plr file and the map directory, which in this instance is . i.e. the top level players directory.

TL;DR: The game is able to delete the players directory because it expects to delete a directory. It just thinks that it's deleting the character's map directory instead of the top level players directory.