Solved - I ultimately realized that the dictionary that I had created was fine. The problem was with the metadata of the actual ebook. I had converted the book from epub to mobi using calibre under Windows. The Calibre GUI under Windows does not allow for changing the language of the ebook in the metadata.
I read that the command line version of Calibre under Linux or Mac DOES allow you to change the language metadata, so I moved over to my Linux machine. Turns out, I did not need to even use command line. When you start Calibre for the first time, it asks you which language you would like to use as default. I chose Swedish (target language for the text).
This worked. The epub file was converted to mobi with Swedish meta info. Uploaded to the Kindle, and now the dictionary works great.