A naked toddler running around in his own yard doesn't bother me. Shaking the fence and annoying the dog are the issues I would discuss with the neighbor. Not the cops, childrens services etc.- just the kid's parents.
OP: Why are you so bothered by an undressed little kid? That seems to be more of an issue with you than the fence and the dog.
I have seen many people on this board and others say that they are uncomfortable with interacting with other people's children even in public (and with everyone clothed), because they are afraid of being accused of being child predators. If our society is so quick to assume those motivations, which can seriously ruin the life of an innocent accusee, then I can't blame people for being cautious. The parents presumably think neighbors seeing their naked child is ok, but what about the other neighbors? What if there's a nut two doors down who will accuse the OP of pedophilia for looking at a naked little boy, even if he's displaying himself on her fence?
Regardless of possible accusations, in most of USA society it is considered inappropriate to be displaying or looking at people's privates in public. Some parts of society may make an exception for naked small children, but others do not.
IMO, the OP's discomfort with seeing a stranger's private parts is a completely understandable product of our society. It's not an "issue with [the OP]"; it's an issue with society. Whether those societal norms are "right" or "wrong" has nothing to do with the OP.
On Topic: I think it would be worth talking to the parents about him bothering the dog and the nakedness making you uncomfortable, assuming that the neighbors seem to be reasonable people in general.
I also like the idea of trying to add some sort of privacy feature to the fence. If planting something along the fence is out of the question, then the privacy slats or some opaque panels to place on the inside of the fence might work. Some potted plants (e.g. bushes or vines on a trellis) might also work; they could be placed along the fence without being a permanent addition. If the barrier goes up and he is still managing to provoke the dog, then you can talk to the parents on that basis.