> If the króna fluctuates so much, wouldn't that also indicate that demand for the króna just fluctuates a lot?

Yes, relative to the size of Iceland's economy. Average daily ISK turnover on the interbank market is only 4 or 5 million EUR [1]. A single commercial transaction, like the purchase of a new trawler from abroad, can easily be worth 2-3x that amount and cause the exchange rate to spike due to the lack of liquidity.

[1] https://cb.is/news-and-publications/article/interbank-market...