I said it should work, I didn't say to go changing stuff. Are you saying that if you don't save the PHP file as UTF-8 the email is sent with line breaks? How are you sending the email?
What's more, the character set that's used to save the file shouldn't affect PHP's interpretation of "\r\n".
How about what happens if you use literal linebreaks in the source?
$body = "Dear Peter,
I am happy to ";