Here the ä is described as:

	        character: ä (228, #o344, #xe4)
	preferred charset: iso-8859-15 (ISO/IEC 8859/15)
	       code point: 0xE4
	           syntax: w 	which means: word
	         category: .:Base, j:Japanese, l:Latin
	      buffer code: #xC3 #xA4
	        file code: #xE4 (encoded by coding system iso-latin-9-unix)
	          display: by this font (glyph code)
	    x:-b&h-lucidatypewriter-medium-r-normal-sans-10-100-75-75-m-60- 
iso10646-1 (#xE4)

The buffer's encoding is "0" as well, i.e., ISO Latin 1 or 15.

BTW, the issue is correct in UTF-8 environment.abbreviation


In GNU Emacs 23.1.50.1 (powerpc-apple-darwin8.11.0, X toolkit, Xaw3d  
scroll bars)
  of 2009-07-30 on Latsche.local
Windowing system distributor `The XFree86 Project, Inc', version  
11.0.40400000
configured using `configure  '--without-sound' '--without-pop' '-- 
with-dbus' '--with-libotf' '--with-x-toolkit=athena' '--x-includes=/ 
usr/X11R6/include' '--x-libraries=/usr/X11R6/lib' '--enable- 
locallisppath=/Library/Application Support/Emacs/calendar23:/Library/ 
Application Support/Emacs' 'CPPFLAGS=-no-cpp-precomp -I/sw/include -I/ 
sw/lib/pango-ft219/include/pango-1.0 -idirafter /usr/X11R6/include'  
'CFLAGS=-ggdb3 -gfull -mtraceback=full -Wno-pointer-sign -H -pipe - 
fPIC -mcpu=7450 -mtune=7450 -fast -mpim-altivec -ftree-vectorize - 
foptimize-register-move -freorder-blocks -fthread-jumps -fpeephole - 
fno-crossjumping' 'LDFLAGS=-dead_strip -multiply_defined suppress -L/ 
sw/lib''

Important settings:
   value of $LC_ALL: nil
   value of $LC_COLLATE: nil
   value of $LC_CTYPE: de_DE.ISO8859-15
   value of $LC_MESSAGES: nil
   value of $LC_MONETARY: nil
   value of $LC_NUMERIC: nil
   value of $LC_TIME: nil
   value of $LANG: de_DE.ISO8859-15
   value of $XMODIFIERS: nil
   locale-coding-system: iso-latin-9-unix
   default-enable-multibyte-characters: t

Major mode: Dired by name

Minor modes in effect:
   shell-dirtrack-mode: t
   show-paren-mode: t
   display-time-mode: t
   tooltip-mode: t
   tool-bar-mode: t
   mouse-wheel-mode: t
   file-name-shadow-mode: t
   global-font-lock-mode: t
   font-lock-mode: t
   blink-cursor-mode: t
   global-auto-composition-mode: t
   auto-composition-mode: t
   auto-encryption-mode: t
   auto-compression-mode: t
   column-number-mode: t
   line-number-mode: t
   transient-mark-mode: t

--
Greetings

   Pete

If you're not confused, you're not paying attention.