It is not recommended to access local discs of the SQL Server. It will require admin permissions and also it is a potential security vulnerability.
You can create XML using different techniques, starting from select... for XML to constructing XML using .NET integration, depending on data source for XML and required XML structure. Then you can store constructed XML inside database, or send it to client that will store it wherever needed.
If you want to get more help on constructing XML on SQL Server, please provide description on how do you get the data for XML, expected structure of XML, and samples of both.