2.7 is no longer relevant, and it looks like these examples are working now:

>>> xmlrpc.client.dumps(('\u20ac',), encoding='iso-8859-1')
'<params>\n<param>\n<value><string>€</string></value>\n</param>\n</params>\n'
>>> xmlrpc.client.dumps((u'\u20ac',), encoding='iso-8859-1')
'<params>\n<param>\n<value><string>€</string></value>\n</param>\n</params>\n'

There is possibly still a documentation enhancement to make regarding non-ascii strings. This is what I get now with Serhiy's examples:

>>> xmlrpc.client.loads(xmlrpc.client.dumps(('\xe2\x82\xac',)))
(('â\x82¬',), None)
>>> xmlrpc.client.loads(xmlrpc.client.dumps(('\r',)))
(('\n',), None)
>>> xmlrpc.client.loads(xmlrpc.client.dumps(('\r\n',)))
(('\n',), None)