Cats afraid of visiting dog

Hi all,
My grown daughter has a very nice dog that she brings with her on occasional visits. My 2 cats are deathly afraid of the dog, and retreat to an upstairs bedroom from the time they see daughter (just associating her with the dog) until well after they leave. The dog's natural reaction has been to lunge after them when they run, which further aggrivates the situation. We can live this way for a couple of days, with the cats huddled upstairs, but daughter's announced that she's returning to the nest and must bring the dog for at least a few months. I love the dog and I love my cats.
The dog can stay outside, but his just being on our decks completely throws the cats into their fear mode. We are hoping that we can get the animals accustomed to each other if we work patiently on it. Daughter has broken the dog, when in the city, of lunging at squirrels and cats. We figure that if the cats can calm down and face off with him they could show him who's boss, for he really isn't intentionally hurtful, and has been in a room with a calm cat and didn't bat an eye.
Any suggestions for achieving this goal will be most welcome.
thanks,
Toni