Bank of New Zealand currency strategist Mike Jones said the market reaction looked appropriate as investors factored in the risk of New Zealand's milk powder exports taking a hit.
New Zealand dairy exports in the 12 months to June 2013 totalled $11.5 billion, of which $2.8b worth went to China.
Any long-term implications will depend on Fonterra's and New Zealand's ability to reassure customers over the quality and safety of NZ food exports, ASB Bank said.
"Nevertheless, as New Zealand accounts for around a third of globally-traded dairy product, it is hard for consumers to substantially substitute away from New Zealand product," ASB said in a commentary.
Foreign exchange dealers noted the DCD-residue issue in January receded relatively quickly.
The Bank of New Zealand and Westpac said it was too early to change their economic forecasts on the back of the contamination news.
The market's attention is now turning to Wednesday's dairy auction, which was expected to be strong before the weekend's developments.
Fonterra said none of the products that it has sold or will continue to sell on the GlobalDairyTrade auction platform are affected by the current quality issue.
China and Russia have placed import bans on New Zealand milk powder, according to media reports.
"The bans will eventually be lifted as the picture becomes clearer about exactly what products contain the affected protein, and where they are," ANZ said in a commentary.
"Of greater import to New Zealand is the question of how much lasting damage has been done to our reputation for clean, safe food, and our trustworthiness when it comes to revealing issues promptly," ANZ said. "Trust needs to be rebuilt, and we are sure high-powered delegations are in overdrive," the bank said.
