Ed,
You shouldn’t be getting an exception. That error pops up when ever your file encoding (I’m assuming you have a default XML header that specifies the encoding as “UTF-8”) does not match the default workbench encoding. The default for Windows is cp1252. You can change this under the Window->Prefs->Workbench->Editors setting (At the bottom). Normally when you get this, just hit “yes” to save the file anyway. Or you can change your workbench encoding to UTF-8 (Which is fine as well).
This warning doesn’t usually effect English locales since our alphabets consists of pretty much ASCII codes. But this warning becomes important if for example you have your file encoding set to “ASCII” and your workbench encoding is in Big5 and in your XML you type a lot of international characters, then go to save the file; because of the ASCII encoding set for the XML file, your double-byte characters will be ruined when they written out.