This is the 21st Century. It's time for Unicode. OS X does a decent job of supporting Unicode overall, but it is far from perfect. Perhaps the most noticeable is the mass confusion that is Unicode in the terminal. The problem is actually legion, and it takes a little effort to fix it. But you can fix it and you can do it today.

Start at this article on Internationalizing the Mac OS X terminal. Following the instructions there will get you 90% of the way there. You will install a new version of bash and coreutils (for ls, cd, etc.), you'll set up your locale information (actually you only need to set LANG, in my experience. I export LANG=en_US.UTF-8 in my .bashrc).

If you use OS X's default vim (/usr/bin/vim), it will Just Work. But if you have vim 7.0 from some other source, it may or may not work. In particular if you do sudo port install vim you'll probably get a broken vim. Be sure to use the multibyte variant if you install from ports.

If you use iTerm, it might work worse than before you made the changes above. But notice that it works fine if you run another bash instance, or screen. I'm not sure but I think you fix it with the LC_CTYPE hack detailed in this article. Those .inputrc lines probably won't hurt either, though I'm not sure what problem they fix. One of those two changes seems to have fixed the iTerm problem.

Speaking of screen, you probably want to add defutf8 on to your ~/.screenrc.

I'm curious if things work out of the box in $YOURFAVORITEDISTRO. I've previously mucked about with unicode so much in Debian and Ubuntu I have no recollection of what the default state of affairs is. Try the following and let me know in the comments how it worked.

echo æøÜÉ > /tmp/ƒøø
ls /tmp/ƒøø
cat /tmp/ƒ<tab>
vim /tmp/ƒøø
screen vim /tmp/ƒøø

For me, I see exactly that and exactly what you'd expect on the terminal and in vim (both in and out of screen), which has never all happened in OS X for me before. It does work over ssh on my Debian box, but as I say I've played with things there so it may or may not have worked out of the box.