Chiron, my chickens love to take dust baths, and they have their favorite spots in the garden, I mix DE into the soil in their dust bath spots, and it really helps with any parasites they need to get rid of. I think your idea for doing this for squirrels is wonderful :)
I make sure there is also water for wild birds to bath in, this helps them cool down when its hot, and also is good for getting rid of skin parasites. Lizards also enjoy a good bath.
Animals are very clever when it comes to finding out what works for them. My horse used to roll all over the wild fennel that grew in her paddock. After watching her do this, I realised that she didn't have any bot flies, or blow flies, hanging around her, smart girl :)