As far as I can tell I shouldn\'t be using ÅÄÖ (somthing like they have no visual representation in ASCII??).
So what is considered more SEO friendly? Replacing i.e. all
I'd suggest using the IDNA ToASCII that is the standard for internationalised top-level domains. ICANN have recently approved native-script top level domains using this algorithm, so I'd be surprised if any of the major search engines decided not to support it in future.
http://en.wikipedia.org/wiki/Internationalized_domain_name