Can I make git recognize a UTF-16 file as text?

There is a very simple solution that works out of the box on Unices.

For example, with Apple's .strings files just:

1. Create a .gitattributes file in the root of your repository with:

    *.strings diff=localizablestrings
   

2. Add the following to your ~/.gitconfig file:

    [diff "localizablestrings"]
    textconv = "iconv -f utf-16 -t utf-8"
   

Source: Diff .strings files in Git (and older post from 2010).

I've been struggling with this problem for a while, and just discovered (for me) a perfect solution:

$ git config --global diff.tool vimdiff      # or merge.tool to get merging too!
$ git difftool commit1 commit2

git difftool takes the same arguments as git diff would, but runs a diff program of your choice instead of the built-in GNU diff. So pick a multibyte-aware diff (in my case, vim in diff mode) and just use git difftool instead of git diff.

Find "difftool" too long to type? No problem:

$ git config --global alias.dt difftool
$ git dt commit1 commit2

Git rocks.

Have you tried setting your .gitattributes to treat it as a text file?

e.g.:

*.vmc diff

More details at http://www.git-scm.com/docs/gitattributes.html.