[xsl] Diacritics in original document

["Mark Wilson pubs@xxxxxxxxxxxx" <xsl-list-service@xxxxxxxxxxxxxxxxxxxxxx>]

I am working with an original xml file that says <?xml version="1.0" 
encoding="UTF-8"?>.
However, elements whose values contain diacritics appear to be something 
else (see fC<r in the two examples below):
XML rendition in Oxygen:
Mittheilungen der tauschvereinigung fuCKr postwerthzeichen zu Elberfeld.

Which, here in my email, using Western (Windows-1252) are rendered 
correctly as:
Mittheilungen der tauschvereinigung fuLr postwerthzeichen zu Elberfeld.

The text output from my transformations have the same problem.

Do I need to change the encoding in my stylesheets? If so, how? Or is 
there a solution?
Thanks,
Mark