Bank of New Zealand currency strategist Mike Jones the currency had been "belted" as the markets took a "shoot-first-and-ask-questions-later" response.
He said the market reaction looked appropriate as investors factored in the risk of New Zealands's milk powder exports taking a hit.
"The New Zealand dollar will remain under pressure until such time as confidence in New Zealand dairy can be restored," Jones said in a commentary.
"However, given the tendency for the exchange rate to overreact to these sorts of news events, we expect to see a bounce at some point," Jones said.
"Just when that comes will depend on the response from Fonterra, authorities and other interested parties," he said.
Dealers noted the DCD-residue issue in January receded relatively quickly.
Fonterra has just issued a statement saying that none of the products it has sold or will continue to sell on its GlobalDairyTrade online auction platform are affected by the issue.
The online auctions are held every two weeks, with different customers and suppliers bidding for a variety of dairy products for delivery at different times.
The next is this week, with prices and details available early on Wednesday morning.
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.
In 2012, dairy products made up almost 40 per cent of NZ's exports to China, and the people's republic took almost a quarter of New Zealand's milk powder.
China and Russia have placed import bans on New Zealand milk powder.
"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 promptlym," ANZ said. "Trust needs to be rebuilt, and we are sure high-powered delegations are in overdrive," the bank said.
Read also 'Milk scare angers parents'.
