Dynamic works as intended. This is a rather esoteric setting that places the background image at diagram location (0, 0). Additionally, a dynamic background image is affected by scrolling and zooming. You can verify that dynamic works by removing all elements from your diagram, then creating a single node, explicitly specifying (0, 0) as the node's location, and finally using "View" -> "Fit Content".
Are you sure that dynamic is the background image behavior you need? All other available behaviors are much more common.