The Dwarf can engage that enemy. The enemy card in front of the wizard is removed from wizard's engagement zone into the dwarf's. Then the dwarf attack the enemy.
Even if the dwarf already has enemies in front of him, as long as it's less than 3, he can engage additional enemies (up to 3 at once).
To be more precise - even if dward already has 3 engaged enemies, he may try to engage one more. This enemy will deal damage to dwarf and retreat to the shadoes (can be useful if you are going to travel to new location and use it to send more enemies from engagement zone to shadows)