Special characters in custom taxonomy?!

I have created a custom taxonomy for a custom post type. Than I have a script automatically adding posts to the taxonomy based on the first letter – so “Above” goes into the taxonomy “A” and so on. The problem is that “Örn” should go into “Ö” but doesn’t – it goes into “A”. WHAT?
If I try to do it manually and turn of the function, write a “Ö” in the taxonomy field, save it and it is converted to an “A”.

Any ideas?