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Ran the test as 'python -W error -m test.test_logging' on latest 3.6 version. No idea what causes this; full traceback attached. Not sure if it's relevant, but I'm running Windows 7.

Maybe, `socket.getfqdn()` returns non-ASCII string in your environment.
smtpd.py has `-u` option which enables utf-8 support.
smtpd.SMTPServer has enable_SMTPUTF8 option.
test_logging.TestSMTPServer should enable this option.
Could you test adding `enable_SMTPUTF8=True` kwarg here?
https://github.com/python/cpython/blob/master/Lib/test/test_logging.py#L682-L683 

Domain names should never have non-ascii in them. They should be IDNA encoded. There is a known problem where Windows will return non-ascii domain names if the local hostname is configured naively (see issue 9377). SMTPUTF8 might be a workaround in smtpd's case, since I think it will allow handling of such domain names, but that could actually be considered an RFC violation in smtpd if it works :)
That said, looking at the traceback I'm not convinced that's the problem. The test using support.HOST, and that is 127.0.0.1.

I am unable to reproduce this under Windows with either 32-bit or 64-bit Python, using revision 26dd6e7f. I used Windows 10 rather than 7 as that's all I can test on, but I don't believe it would make a difference. Is this error still reproducible? If not, I'll close this issue.

I'm not home to check, but judging by the error message and previous discussions with other developers, it seems indeed like an issue with a non-ASCII character in my hostname. I've changed my hostname since then, so I'm going to close this as won't fix. If it turns out that the issue is still present, I'll re-open it.
More details: I'm 90% sure that the issue is that Windows encodes non-ASCII characters as 'cp1252' (at least on my machine); subsequently trying to decode as 'ascii' or 'utf-8' doesn't work and throws an error. There's already another open issue about this (#26226).