Question about character encoding

Hi!

This may be completely stupid, but I just can't figure...

I installed the latest cygwin snapshot along with PostgreSQL 7.2; I
access the DB using the latest PGAdmin II 1.2.0. Almost everything seems
to be working fine - with one major glitch: I just cannot insert nor
select strings containing german umlaute or any other special characters
into my database.

I selected Unicode as encoding (was that correct?), but when I do

INSERT INTO test VALUES (1,'this is an example string containing ä, ö,
ü, Ä, Ö, Ü, ß');

I just get "Invalid UNICODE character sequence found". So far I just
cannot store nor retrieve ordinary german text...

What do I need to do in order to get this working? So far I haven't
found any postings about people having elementary problems like this, so
I think it's just something obvious that I nevertheless fail to see -
could you please enlighten me? Is the binary that came with cygwin
compiled with locale- and multibyte-support at all?

Thanks,

Markus