It used to be commonly used, particularly in areas where refrigeration was expensive or limited. Fifty years ago in rural Alaska it was almost the only milk available. Also it was used extensively on hiking trips. And there are some recipes that still prefer powdered milk because it is more stable in cooking.
I do know what powdered milk (NOT milk powder in the US) is but if I was asked to make a list of 5000 words I thought I might need in French, powdered milk would not be on it. Is it wildly popular in France or something? Just wondering why Duo Lingo would introduce such an uncommon object?
"Pour cette recette, j'utilise du lait en poudre plutôt que du lait en bouteille ou du lait concentré": those are the usual trade descriptions of various sorts of milk you can find on the market.
"La poudre de lait n'est pas aussi blanche que la poudre de riz.": this is how you can refer to it with your own words with a focus on "powder" rather than on "milk".
By definition, powders of any kind are dry because you get powder either by grinding a dry thing or by withdrawing water from a naturally wet material.
On powdered milk boxes or cans, you will read "lait en poudre" with some additives in the formula, (for baby powdered milk in particular). And "poudre de lait" would suggest that there are no additives.
The one salient thing for Duolingo to notice (I've reported it) is that "the milk powder" is not an actual English expression. We do know what it is, but we call it "powdered milk." (In the 60s, I guess, before the kind of milk that the lactose-intolerant can drink was available in cartons, people could get powdered milk that had the added necessary enzyme; I had a friend who had to drink that stuff.)