There is an XML parser called EXPAT, which has been ported to the AS/400 (or whatever it is called this week) by Scott Klemens. You can find it here:
I have some sample code showing how to use the parser to bring XML directly from the stream file into my database. (I am at email@example.com)
If your parser can’t work with data in UTF-8 or UTF-16 encodings, then you should try a different parser. But I suspect that it probably can, if it is a reputable one. There should be no need to copy the XML into a ‘native DDS-based’ file in order to process it.