Hi. Dosbox supports an Icelandic keyboard layout (via "keyb is") but does not support the codepage that was traditionally used on DOS machines in Iceland. This is codepage 861 (https://en.wikipedia.org/wiki/Code_page_861). I ran into this issue when playing with the Fjölnir runtime (https://en.wikipedia.org/wiki/Fj%C3%B6lnir%28_programming_language%29). All its messages and errors are in CP861, so the Icelandic characters in its output are incorrectly displayed by Dosbox.
The program is available here: http://www.hi.is/~snorri/087133-03/fjolnir.zip (bin\fjolnir.exe).
E.g. the first line of its output should be "Fjölnir Íslensk útgáfa 1.00 Raðnúmer: 00000000" but it's incorrectly displayed as "Fjölnir Ñslensk útgáfa 1.00 Raînúmer: 00000000".
I had a look at src/dos/dos_codepages.h but it seems over my head as all its data is autogenerated.
That codepage isn't built in, but you can use a CPI file.
For example, using EGA9.CPX from FreeDOS (an FTP server search engine should find some mirrors for the file), you would use this command in DOSBox: keyb is 861 ega9.cpx