Both act mesmerized: love at first sight?
Well... something. I've noticed a great deal of curiosity on both sides at PCV. Dogs like to watch squirrels. Squirrels in turn often seem fascinated by dogs on their leashes, and will run away only if the dog barks or lunges. On the other hand, Riley the Cat drives all squirrels bananas immediately (as do hawks).
Here's a cute video of a baby squirrel befriending a dog: