* Taiwan cbank urges companies to be vigilant about FX hedging
* Says stronger Taiwan dollar is due to foreign fund inflows
* Says currency level is determined by demand vs supply (Adds background)
By Faith Hung
TAIPEI, May 3 (Reuters) - Taiwan's central bank deputy governor said on Wednesday volatility in the local currency against the U.S. dollar is "unavoidable" but that it would not intervene in response to continuing foreign fund inflows.
The central bank has been under pressure as the surging currency could cloud prospects for Taiwan's export-driven economy.
Despite this concern, the central bank has refrained from weakening the currency through market intervention, as a precaution against the possibility of being labeled a currency manipulator by the administration of U.S. President Donald Trump.
Taiwan appeared again alongside China, Japan, South Korea, Switzerland and Germany on the latest watchlist published last month of countries that the United States would monitor as potential currency manipulators.
The semi-annual U.S. Treasury currency report has singled out those trading partners for closer scrutiny in an effort to curb what the U.S. calls "unfair currency practices."
The Taiwan dollar has strengthened about 8 percent against the U.S. dollar so far this year, making it the best-performing currency in Asia.
Earlier on Wednesday, it was traded at T$29.940, an intraday level not seen in two and half a years.
"Currency volatility is unavoidable," deputy governor Yang Chin-long said in response to questions from lawmakers at a legislative hearing, adding that the surge can be attributed to foreign fund inflows.
"Companies must be vigilant about currency hedging," he said, adding that the central bank would not intervene if foreign fund inflows continues.
"When the Taiwan dollar trades at T$29 - T$30 (to the U.S. dollar), the market perceives the U.S. dollar as too cheap," he said.
"The currency exchange rate is a matter of supply versus demand." (Additional reporting by Loh Liang-sa; Editing by Sam Holmes)