On 27 Nov 2015 8:06 pm, "Eli Zaretskii" <eliz@gnu.org> wrote:
> > Experimentation shows that it also applies to replace-string, but
> > not replace-regexp ("[ab]" does not match "ä" even when
> > replace-character-fold is non-nil).  I'm not sure what's intended
> > here, particularly since replace-regexp does honor case-fold-search.
>
> Not sure whether this is intended, please submit a bug report.

It's a known limitation. Char folding works by converting a plain string to
a regexp, so it does not work on regexps.
The same happen with isearch. You can't do a char-folding regexp isearch.