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My guess is that it's the Peruvian yarn, which may have been spun with some of the lanolin left in it. If so, what you're smelling is wet sheep, not wet dog. It'll likely fade away after a while, or with another washing. Another possibility is that you're smelling some leftover dye. Again, that should disappear with time and washing.
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 BaaBaa on Ravelry
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