Google is going to do just that in Chrome. Of course doing this change means that some existing domains will now stop working correctly which may or may not be ok with their owners.
The other option would be to do this based on the browser's current language preference configuration. But that means that unless your domain is in ASCII, you can never be sure how it's going to be rendered on your customer's browsers which would make IDN domains second-class compared to ASCII domains.
I can easily continue replacing "þ" and "ð" with "th", continue removing diacritics, but it feels like being robbed of an aspect of your language.