Symptom
You cannot type high-bit characters at the command line or drag items named with them into the Terminal window.
Solution
1. Open Terminal.
2. Choose Windows Settings from the Terminal menu. The Terminal Inspector window appears.
3. Choose Emulation from the pop-up menu.
4. Make sure the checkbox for "Use option key as meta key" is not selected.
5. Select the checkbox for "Escape 8-bit chars with Ctrl-V".
6. Choose Display from the pop-up menu.
7. If necessary, choose Unicode (UTF-8) from the Character Set Encoding pop-up menu.
Note: If you are using tcsh or bash, make sure that "Escape 8 bit characters with Ctrl-V" is selected in the Emulation pane of the Terminal Inspector. If you are using zsh, make sure that "Escape 8 bit characters with Ctrl-V" is not selected. You can then drag/type names of folders with high-bit characters correctly. (tcsh/bash will show the escaped form of the character; zsh will show the actual character.)