You don't technically need to have a blade that's as wide as the thing you're cutting. Cracks will propagate through anything with enough energy put into it.
Of course it would be possible with infinite force - that was a mistake of mine. But do you think dwarves could generate that kind of force? The stresses involved would tear their arms off, regardless of strength, because of the g-forces away from their bodies being too strong for their shoulders. Such acts should be beyond the abilities of any dwarf, however legendary.
I thought demons were huge, but I really have no idea how big they are. If they are smaller than I thought, bisection could still be feasible. The only way that a short sword could cut through something thicker than its length would be if 1. the force was so huge that it vaporised, impossible since the dwarf's arms would be torn off by striking with such force or 2. if the force is within sensible bounds, the body was brittle and fractured, which is not really the case for flesh. Flesh tears, but these tears do not really spread like brittle fractures unless the flesh is cut most of the way through - if the force is reasonable for a dwarf.
It all comes down to how big demons are. I have no problems with a dwarf chopping off a goblin's leg in 1 stroke, but not an elephant's, and not a demon's the size of an elephant's either.
As for strengthening goblins, I already suggested steel armour, proper siegecraft with wall destruction and the end of the fainting from broken toes nonsense. Generals should be just as fallible as anyone else.