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So we know that in Swedish and in German it is a coincidence. So what about Turkish and Hungarian, anyone?
Yes, you're right that "oe" is the correct replacement for "ö" (as is "ae" for "ä", "ue" for ü, and "ss" for "ß") , but I don't think that Duolingo accepts the replacement characters.
Generally, the replacement characters are only used as a makeshift solution if there is absolutely no possibility to type the real German characters.