Make git diff show UTF8 encoded characters properly

I have a file with Swedish characters in it (åäö) encoded with UTF8.

If I cat the file it displays fine, but if I do git diff the special characters are printed, for example, as <F6>.

Example git diff output:

-            name: 'Magler<F6>d, S<F6>der<E5>sen',

What I wanted to see:

-            name: 'Magleröd, Söderåsen',

I found another question related to git and encoding problems: git, msysgit, accents, utf-8, the definitive answersIt says all problems should be fixed in git version 1.7.10. I have version 1.8.1.2

What can I do to make git diff properly display åäö?