Can Exchange Server handle non-ASCII characters in domain names?

No. The Internet Engineering Task Force (IETF) has updated the Requests for Comments (RFC) that govern permissible characters in DNS names. Therefore, names such as Étudiant.fr and møller.no are now perfectly legal, assuming that your DNS client and server support them. Exchange and Outlook, however, don't currently support such names. RFC 3490 explains how applications can and should convert non-ASCII characters to an ASCII representation, but at the time of this writing, I haven't heard that Microsoft has any plans to modify Exchange or Outlook to do so.