New Zealand's dollar has suffered a shock amid plummeting milk prices, dimming expectations it will reach parity with the Aussie.
The global dairy price index has fallen 18.2 per cent since February, fuelling fears that it could derail the outperformance of NZ's economy.
NZ's dollar was the worst performer against a basket of currencies this week, shedding 1.1 per cent. This is compared with the Aussie being among the best, rallying 0.2 per cent against the same basket.
But the sharp fall in milk prices is unlikely to stop the NZ Reserve Bank from continuing to increase interest rates.
Although dairy accounts for about 30 per cent of NZ's exports, economists and analysts say it isn't the only ingredient driving the country's growth.
ANZ analyst David Croy said other soft commodities had offset weaker dairy prices, with forestry and seafood at highs and meat, skins and wool close to peaks.
''Waning dairy prices are doing nothing more than taking off the extremities in the dairy payout from exceptional to high,'' Mr Croy said.
ANZ's commodity price index eased 0.1 per cent last month, which Mr Croy said was a ''remarkable feat'', considering the dairy component fell 3.5 per cent.
He said NZ was also benefiting from a lift in labour productivity, which rose 2.1 per cent in the year to March.
Mr Croy said there was also no evidence of foreign investors withdrawing from NZ debt markets, with about $NZ51.5 billion ($47.6 billion) of its debts securities held offshore.
''NZ basis swap spreads are not just positive but are the widest in the G10, adding to the attraction of a high absolute base rate. Expect a persistent bid behind the NZ dollar.''
New Zealand became the first developed country to begin exiting record low borrowing costs when it lifted its official cash rate 25 basis points to 2.75 per cent last month.
HSBC chief economist Paul Bloxham said he expected further hikes this year, totalling 75 basis points, as NZ's Reserve Bank moves to contain inflation.
''We still expect NZ to be the rock star economy of 2014,'' said Mr Bloxham, a former Australian Reserve Bank official.
Much of its economic outperformance is stemming from the Canterbury rebuild after a series of earthquakes in 2011.
''That story is still supporting growth,'' Mr Bloxham said.
But the expectations of the NZ dollar hitting parity with the Aussie are being questioned.
Westpac currency strategist Sean Callow said the fall in dairy prices had helped ''cement the case for AUD/NZD having formed a cycle low'' of about $NZ1.05, and given there was a degree of stability in Australia's key commodities, particularly iron ore, the pair could rise to $NZ1.10.
''This is no cause for panic for NZ exporters but has been a jolt for the bearish AUD/NZD case,'' Mr Callow said.
''In our final ForeX Focus of 2013, we suggested long AUD/NZD around $NZ1.05 as one of the potential trades of Q1 2014. The time could be right for longs, but the $NZ1.05 handle may have come and gone.''
The Aussie was fetching about $NZ1.0808 on Friday. The pair as averaged $NZ1.0722 this year and hit a low of $NZ1.0532 on January 24.
Mr Callow said while Westpac expected the NZ Reserve Bank to lift interest rates another 25 basis points this month and again in June, from their the outlook was cloudy.