Yeah, that looks like a driver issue. Sometimes Windows thinks you're at a certain resolution and the graphics driver thinks otherwise.

Valheim, btw, doesn't know a true full sceen mode with independent resolution. It only knows windowed mode and full screen windowed mode. So even if you're at full screen with a lower resolution, you will still use the resolution set in Windows (to complicate matters, this does NOT have to be the native resolution of your monitor!) and the game will scale to that resoution.

My suggestion is to make sure that Windows display resolution is set to the native monitor resolution, then to start Valheim, and turn off Full Screen mode (you may have to fiddle a bit with mouse to actually hit the right button, it should glow if your invisible mouse arrow hits it, ignore the real mouse cursor).

When Valheim shrinks to an actual window, the mouse should start behaving in a normal manner.

Just to make sure it got it, get out off the game, get back in and try to set it back to full screen. Make also sure that the resolution in-game is really the one desired.

You may also try setting the resolution in-game to the native one of the monitor, if your computer can handle it.