I'm sorry, I'm going to go against the grain here. I do think you're overreacting. A dog is not a child, and I say that as a dog owner who adores her guy, spoils him rotten, and takes him almost everywhere. I'm well aware, though, that not everyone else will see my dog as do I, and some people have issues with dogs period. Hey, I don't always like every dog I come across either, no matter how much their owners love them.
You're offended because your in-laws like one of your dogs and don't care for the other one. Stinky, however, as you yourself say, doesn't give a flip. She won't develop any complexes over it.
It sounds to me as if your in-laws are trying to develop a relationship with Baby while young so it goes better with Baby than they feel it did with Stinky. That's a good thing, not a bad thing, particularly if Father-in-law is a bit uneasy with dogs. Me, I'd be supporting that.
As far as taking him on the holiday, that decision should be made purely on how much you want to hassle with it.