I'm currently trying to work out the best way to
convert a string of hex into the characters represented by each hex byte.

Which isn't what your subject line says ... your
subject line is talking about an encoding which
is different than your opening sentence which is
talking about abstract characters.  I'm answering
the sentence, not the subject line.

I'm using xslt 2.0. So far I've come up with a
function that simply does a lookup to from the
hex value to the ascii character that hex value represents (see below).

Can anyone suggest a better way? Is there a way
(without using a huge lookup to achieve a
similar sort of  thing for UTF-8 chars?

Mechanically calculating the hexadecimal code
point and translating it is labourious but
straightforward.  Below is an example, but I
cannot compare it to yours since I cannot see the way you've approached it.

t:\ftemp>type hex2ascii.xsl
<?xml version="1.0" encoding="US-ASCII"?>
<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
                xmlns:xsd="http://www.w3.org/2001/XMLSchema"
                xmlns:k="urn:x-Ken"
                exclude-result-prefixes="xsd k"
                version="2.0">

<xsl:variable name="hexdigits"
   select="('0','1','2','3','4','5','6','7','8','9','A','B','C','D','E','F')
"/>

<xsl:template match="/">
  <xsl:value-of select="k:hex2ascii('004400E9006A00E0')"/>
</xsl:template>

<xsl:function name="k:hex2ascii" as="xsd:string?">
  <xsl:param name="hex" as="xsd:string"/>
  <xsl:variable name="codepoints" as="xsd:integer*">
    <xsl:for-each select="1 to ( string-length($hex) idiv 4 )">
      <xsl:sequence select=
       "(index-of($hexdigits,substring($hex,(. - 1) * 4 + 1,1)) - 1 ) * 4096
+
        (index-of($hexdigits,substring($hex,(. - 1) * 4 + 2,1)) - 1 ) *  256
+
        (index-of($hexdigits,substring($hex,(. - 1) * 4 + 3,1)) - 1 ) *   16
+
        (index-of($hexdigits,substring($hex,(. - 1) * 4 + 4,1)) - 1 )"/>
    </xsl:for-each>
  </xsl:variable>
  <xsl:sequence select="codepoints-to-string($codepoints)"/>
</xsl:function>

</xsl:stylesheet>
t:\ftemp>xslt2 hex2ascii.xsl hex2ascii.xsl hex2ascii.txt

t:\ftemp>cat hex2ascii.txt
Dij`
t:\ftemp>

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