The recently discovered Fe^II/α-ketoglutarate-dependent dioxygenase AsqJ from Aspergillus nidulans stereoselectively catalyzes a multistep synthesis of quinolone alkaloids, natural products with significant biomedical applications. To probe molecular mechanisms of this elusive catalytic process, we combine here multi-scale quantum and classical molecular simulations with X-ray crystallography, and in vitro biochemical activity studies. We discover that methylation of the substrate is essential for the activity of AsqJ, establishing molecular strain that fine-tunes π-stacking interactions within the active site. To rationally engineer AsqJ for modified substrates, we amplify dispersive interactions within the active site. We demonstrate that the engineered enzyme has a drastically enhanced catalytic activity for non-methylated surrogates, confirming our computational data and resolved high-resolution X-ray structures at 1.55 Å resolution. Our combined findings provide crucial mechanistic understanding of the function of AsqJ and showcase how combination of computational and experimental data enables to rationally engineer enzymes.