Gnu, I did warn her about picking him up when he's like this because she seems to be part of the problem. In talking to her, though, she told me that he often comes and sleeps with her in the middle of the night with the dog a short distance away (she's on the futon and the dog is on the couch a couple of feet away) which I didn't realize he was doing, so he has some positive feelings about my niece at least.
The difficult part is that dogs and cats don't process information the same way and they don't have the same social structure so we're trying to figure out what works for everyone and hoping we get it right. The dog is extremely submissive (which is a positive for me) and this particular cat is NOT the alpha of my group.