Mark, It will accept that char ... np with that , But You need to give a valid user 

Can you check this page : http://www.iis.net/learn/manage/configuring-security/application-pool-identities

Also , still if persist , trying running a script in SQL . 

CREATE LOGIN <login_name> WITH PASSWORD = '<PasswordHere>';
GO

Thanks for point out that Sebastian , 
I have pasted only partial. 

 So if my database was called DNNdev, and user was called iis appPool\DNNdev how would the syntax look?

like this: ?

CREATE LOGIN iis appPool\DNNdev WITH PASSWORD = '<PasswordHere>';

DEFAULT_DATABASE= DNNdev

GO

thanks