I'm not familiar with the IBM products you mentioned but it seems to me there is a good chance that the latest release of Monarch version 8 (8.02) would solve your problem.
UTF 16 LE
UFT 16 BE
are supported in that release and I would imagine that should provide the solution you need.
I also had the same problem, but my IT manager came up with a very simple solution that completely solved the problem. We found that if you right click on the .txt file with your mouse you will see an option to export the file to wherever you want to put it. For some reason, this action of exporting the file, instead of dragging and dropping it, completely eliminated the unwanted spaces.