(Bloomberg) -- Foreign demand for a slice of Taiwan’s increasingly profitable companies is threatening to upend the central bank’s decades-old policy of intervening in the local dollar.Central bank board member Chang Chien-yi told Bloomberg in a rare interview that the institution won’t be able to fight currency appreciation if the Taiwan dollar rises on economic fundamentals as the competitiveness of local industries improve.“The next two years will be an important turning point,” Chang said Wednesday. “The central bank will have to respect the markets. It won’t be able to forcefully slow the currency’s appreciation.”The Taiwan central bank’s management of its currency has come under increased scrutiny, with the U.S. Treasury saying in April that it wants to engage Taipei over the “structural undervaluation.” Investors have piled into the island’s tech-driven markets, as the economy outperforms peers that are still gripped by the pandemic, making the Taiwan dollar the best performer in Asia.Taiwan Dollar Gains as U.S. Hints at Currency Valuation PressureThe U.S.-China trade war has sparked a major reshuffling of supply chains and given opportunities to a wide range of Taiwanese exporters, according to Chang. It will also allow Taiwan’s central bank to rethink its currency policy, as exporters may be able to thrive without foreign-exchange support, he said.The Taiwan dollar rose to its highest level since July 1997 in April. Strategists are predicting that it will charge higher in the coming months, while the options market is also showing waning demand to hedge the currency against strength in the greenback. One-month risk reversals are holding close to the lowest level since March.“The comments suggest that the central bank will be willing to tolerate more currency strength, though they are wary of the impact that could have on firm profitability if it moves too much,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. “”This means it will be more important than ever for Taiwanese companies to manage their foreign exchange risks. With the outlook for global trade looking very positive, we are likely to see further strength in the Taiwan dollar.”Currency HedgingAround 97% of companies in Taiwan are small and medium-sized enterprises and many of them are exporters, Chang said. These companies have traditionally been very vulnerable to fluctuations in exchange rates as they lacked the scale and sophistication to hedge their transactions with overseas clients, according to Chang, who also serves as the president of the Taiwan Institute of Economic Research.“SMEs didn’t have the means for currency hedging and they didn’t have a lot of cash on hand,” Chang said by phone. “As soon as they received payments in U.S. dollars, they’d exchange it into Taiwan dollars to pay their suppliers and pay salaries.”“If the Taiwan dollar strengthened, not only might these companies have worked for nothing, they could also be at risk of going bankrupt, which could have caused all kinds of societal problems,” he added.Taiwan Central Bank Insiders Call for Overhaul of Dollar PolicyChang’s remarks are the latest signs of a new openness and tolerance for public debate at Taiwan’s typically taciturn central bank. Last month, two current and one former member of the policy board co-authored a book discussing how much damage the bank’s efforts to maintain a weak currency had done to the economy over the past 20 years.While board members have given interviews in the past, it is rare for them to do so in their role as a central bank board member or to comment on the bank’s policies. Chang, who joined the policy board in January last year, applauded the bank for improving transparency under current Governor Yang Chin-long.But, he pointed out that there are other areas the bank still needs to improve. Almost all of the time at quarterly board meetings is taken up by reports from each of the bank’s departments, leaving little time to fully discuss policies, according to recently published book -- a view that Chang agrees with.Most importantly, he said, the central bank should clearly define its monetary-policy goals, which would allow board members to discuss it in greater depth.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.