two thoughts...please don't take these the wrong way, i am just trying to look at all the options of what may be going on in his head
first thought ...some fettishes develop in childhood, there is a group of people who choose to be treated like dogs, there is even dog shaped hoods that they wear. look up puppy fettish

thought two...As your nephew also likes to cross dress i wonder if this is due to him feeling he was born in the wrong body, some children know they were from a very young age and often go on to opt for gender reassignment in later life.

thought three ...if your nephew does feel he is in the wrong body, he may feel that he is being treated wrong or bad, because he is being treated as a boy when he feels he is not a boy, he may not be able to explain this yet especially as it will still be very confusing and 'wierd' to himself, so acting as a dog may be his way of distracting his parents/others from treating him as a boy.

like i said these are just thoughts and i may be well off the mark, but i do know that children as young as two can know they are in the wrong body, i had a 2 year old in preschool who insisted on wearing the girls dresses whenever he could, he used mums perfume every day and refused to play cars or construction but opted to play dolls or mummies and daddies (always being the mummy). this child is now a teenager and is living as a girl, taking hormones to give him breasts and make him more feminine before he has reassignment surgery for his 18th birthday!
another child, a girl, refused to wear dresses or skirts, played rugby, was made to do ballet eventhough she hated it, preferred the bikes to the prams etc and is now a fully reassigned male. both knew by the age of three that something was not right with them eventhough they could not say what.