Globally investors are focused on the US Federal Reserve's Federal Open Market Committee meeting, which ends Wednesday night, as they wait for clues as to the future direction and pace of change in interest rate policy.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each fell 0.5 per cent, on Tuesday to 5445.4 points and 5446.2 points respectively. In currency markets, the Australian dollar had dropped to US89.94¢ shortly after the ASX closed.

Local shares began their decline shortly after the session opened, having taken a mixed lead from offshore. In the US the S&P 500 edged lower on Monday night, while the Dow Jones Industrial Average was modestly higher after industrial production statistics for the world's biggest economy edged lower for the first time in seven months. In Europe major markets were mixed ahead of the outcome of the Scottish referendum on independence.

Minutes from the Reserve Bank issued on Tuesday once again included a warning on house prices and reiterated the central bank's concern about the relative strength of the Australian dollar. "The exchange rate remains above most estimates of its fundamental value, particularly given the declines in key commodity prices," the minutes stated.

"I was speaking to Qantas Airways chief executive Alan Joyce last week, who told me he would feel more comfortable with an exchange rate around US85¢, and I think most companies exposed to offshore earnings feel similarly," Nikko Asset Management head of Australian equities Brad Potter said.

But his colleague Roger Bridges, Nikko's local head of fixed income, said executives holding out for a drop in the exchange rate to US85¢ had "about zero chance" of getting their wish.

"As long as China's economy remains reasonably strong and the iron ore price remains around current levels then the RBA has little hope of talking the dollar down," Mr Bridges said.

"However, the wild card for global interest rate and currency markets is what the European Central Bank does in the coming months," he said.

In China, the government announced a move to ban dirty coal imports, which could affect local producers. Whitehaven Coal, Australia's biggest straight coalminer, slipped 0.3 per cent to $1.82.

The mining sector was flat overall, enough to make it the best-performing sector on the day after the spot price for iron ore, delivered in China, showed a surprise recovery, rising 3.9 per cent to $US85.20 a tonne.

Iron ore miners jump

Resources giant BHP Billiton was up 0.3 per cent to $35.74, while main rival Rio Tinto added 0.2 per cent to $61.81 amid reports Swiss mining giant Glencore had it in its sights as a takeover target. Iron ore miner Fortescue Metals Group lifted 1 per cent to $4.

Iron ore juniors BC Iron and Atlas Iron were the best-performing stocks in the S&P/ASX 200, climbing 4.9 per cent and 2.6 per cent to $2.15 and 59¢ respectively.

It was losses among the big four banks and Telstra that weighed heaviest on the index.

Commonwealth Bank dropped 1 per cent to $78.19, while Westpac fell 0.8 per cent to $33.50. ANZ lost 0.8 per cent to $32.12, and National Australia Bank shed 0.5 per cent to $33.64.

Telstra was 1.1 per cent lower at $5.43.

The biggest food and liquor sellers were also weaker as the ANZ/Roy Morgan measure of consumer confidence dropped to its lowest level in five weeks. Woolworths edged down 1¢ to $35.20, while Wesfarmers, owner of Coles, slipped 0.4 per cent to $43.02.

Bionic ear maker Cochlear gained 0.3 per cent to $67.43 after receiving critical US regulatory approvals for its Nucleus 6 product. Standards publisher SAI Global lost 1.3 per cent to $4.43 as final bids for its proposed takeover closed with no announcement.

Rare earths miner Lynas Corporation was the worst-performing stock in the S&P/ASX 200 for the second day running, dropping another 7.7 per cent to 12¢. It was revealed on Monday a critical debt refinancing deal had come unstuck.