The roller of the dynamo should run on that ribbed track under the treads. And the axis of rotation of the rotor needs to point very precisely at the axle of the wheel. (I've always checked that with a piece of string!)
BTW: The roller doesn't look worn to me. It looks as if it had been machined that way, compare with a new one. And you may also find a rubber cap that fits over the steel roller although this will increase the diameter and make the dynamo turn at a lower RPM and dim the light in an unwanted way.