Dynamic NAT allows routers to dynamically map private IP addresses to public IP addresses from a pool. The router chooses an available public IP address for outgoing connections and tracks the mapping in its NAT table. When responses come back, it reverses the mapping to deliver packets to the original private IP address. Configuring dynamic NAT involves defining the internal and external interfaces, an ACL for matched addresses, a global address pool, and enabling NAT with the ACL and pool.