I really don't have any experience with IE, but having gotten a few clues elsewhere about how MS stuff behaves around unicode data, I wonder if it might help to put a utf8-formatted "byte order mark" (BOM) at the beginning of your xml file? (Just guessing...)

To get a utf8 version of the BOM at the beginning of an xml file, you could just do something like this (assuming a bourne-style shell and a unix-like "cat" command):

perl -CS 'print "\x{feff}"' | cat - somefile.xml > bomfile.xml
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