The character set you use depends largely on your preference. I usually use either ISO-8859-1 or ISO-8859-15, depending on the characters I need to use, because they're more specific to my demographic so they're a bit smaller than Unicode. Rarely does browser implementation take any longer than Unicode (if it ever does), but I like being specific when I can. If there are characters I need to use from both character sets (not often), or if I have no control over maintenance contracts (more often), I'll use UTF-8. Of course, Cheryl did raise a valid point about the BOM mark that Expression Web uses with UTF-8 being largely unsupported. (I hear Windows actually distorts ISO-8859-1 to its own desires by converting it to Windows-1252 or some such encoding, but that could just be Mac people feeding me this information!)
For the record, I've designed entire sites in XML (most of which I've converted back to HTML because they take too long to load). I tested them in all modern browsers, and I never found an XML parser that didn't support ISO-8859-1 or ISO-8859-15, because, of course, all the parsers were Web browsers. As far as other parsers go, that'd largely depend on what you were using your XML document for.
Also, I'm sure you already know this, but just in case you don't, XHTML pages are hardly ever parsed as XHTML or XML, but 99.999% of the time as HTML. The only time you'll see anything close to XML or true XHTML rendering is if you switch the MIME type of your document (done through .htaccess files or modifying the headers using server-side language) or if you name your file so that it ends with .xhtml or .xml. Even then, I'm told that Firefox uses a hybrid engine that they plan to correct in Firefox 3 or 4. I think XHTML does have a future in browsers as a subset of XML, but not until browsers get faster at parsing it.
Jonathon VS
Freelance Web Artist
www.jonathonvs.com