If the daughter is scared of the dog and doesn't want it around her child then there should be no question, the dog doesn't get anywhere near the baby.
I have two grandchildren. When they visit, my dog, who is small and completely inoffensive, takes herself upstairs because she finds the DGC overwhelming. However, if she does come downstairs I'm supervising her and the youngest DGC, who has a tendency to grab fur, like a hawk, all the time in case DGC might do something that spooks the dog.
I know my dog inside out. She's coming up to her 7th birthday and I've had her since she was an 8 week old puppy. She loves people, is completely calm around children and is very sweet natured. But she is an animal. And because she's an animal she could react without thinking if her fur was yanked suddenly or she was poked in the face or she was hurt in some other way. So I watch her around my small grand children.
Your DH is an idiot if he thinks he knows how his dog is going to react to being hurt or spooked by a child.
Whenever a case of a small child being injured or killed by a dog is reported in the papers there always seems to be someone who says, 'he's never done anything like that before'. Well no, he probably hasn't but there's always the possibility of that first time.
Your DH needs to listen to you. And the dog needs to be kept away from the baby.