Using umlauts to signal that a vowel is pronounced separately is common in a number of languages (like Dutch).

Yeah, I know.

It's just confusing for us poor Swedes since "ö" in Swedish is a separate letter with its own pronunciation, and not a somehow-modified "o". Always takes an extra couple of seconds to remember how "Motörhead" is supposed to be said. :)

But it's not used as an Umlaut here, that's exactly what's confusing. Here this is used as a trema/diaeresis.

That kind of use technically makes it a diaeresis, not an umlaut.