Distraction and interception are the best way to handle these types of situations. If you can see the signs that something is going to work into a problem don't wait to react. As soon as I saw her near the baby I would have been interfering simply because she is so young and unpredictable. I would have gone over and 'talked to her' about bubs, about her being a big sister, about how to touch 'gentle' (or even 'no' touching)' and I physically would have intercepted every time she reached for the dummy, said no firmly but quietly and tried distraction again. If she persisted I would have again said 'no' firmly and then physically moved her (without anger) to a different part of the room or house and distracted her with something else.

It is natural reaction for toddlers to lash out physically, as a parent our job it to try and guide their behaviors so that this doesn't happen, if it does (and it will at some point) you let them know what they have done is wrong and again remove them from the situation. It isn't enough to say no, to punish, you have to remove them from the situation and get them focused on something else.

I am by no means anti smacking (all my kids have been smacked occaisionally) but I don't think that this situation is one where it would be useful at all. She is simply too young to understand that her actions impact someone else and that she can 'hurt' others. She is just trying to get a reaction and attention. If you can give it to her 'before' she gets aggressive you have already won the battle and she has had her needs met.