Borrowing cheap and lending dear, this works fine as long as currency in which you are borrowing (so called funding currency: yen, swiss franc) is stable or depreciates. However when funding currency begins to appreciate rapidly, and you are heavily leveraged, as some hedge funds may be, you can loose you shirt overnight.

This is a warning scenario, or possible deja vu of 1998. Recently Nouriel Roubini posted a piece warning that such scenario could be in the making. Wachovia published a note suggesting that the scale of yen carry trade is much smaller than in 1998, so we should not worry as much. With such a variety of views someone has got to be right.