http://www.weather.com/video/dogs-align-when-doing-their-business-42910?collid=/weather/twc-weather also: http://www.frontiersinzoology.com/content/10/1/80/abstract# I know that biogenetic magnetite has been found in the inner ears of migratory birds and other animals, so if this true, then that may be related to the mechanism.
I tend to think that we humans have almost no idea what senses other creatures could have. Deep-Sea life such as giant squid live in a world that is cold enough to kill us in minutes, and have virtually zero light. Yet they seem to navigate just fine. Many people have hypothesis for how they manage, but the simple truth is that we have no idea.
One of the reasons why I say 'if this is true' is that there may be other cuesin the environment of north/south orientation that the dogs (or other animals) may follow, so it could be that the orientation is not from a magnetic sense at all. And they are pretty vague about the actual numbers as well -- remember that this is a specific phenomenon that they were looking for based on observations in other animals. While that's a perfectly valid study, you don't know how biased the results are as a consequence. Sometimes if you look hard enough, you can't help but find exactly what you were looking for, even if it's not actually there. I'm just saying that this is one study. I would want to see, for example, strong magnets used as part of the study to see if that actually changes the dog's orientation. If dogs are sensitive to the earth's magnetic field, then their orientation ought to change with regards to the location of a powerful electromagnet. I was a geolophysics major (for 2 years, anyway) in college, and we had to learn mapping, and part of that included the use of compasses, of course. Compasses are sensitive enough that they can be easily screwed up by underground metal (such as the pipes and generators and other machinery underground on our campus). So we learned to take readings from two different locations and average them. Compasses don't actually always point to true magnetic north, they simply orient themselves based on local magnetic conditions which while including the earth's magnetic field, can also include other metallic objects and the magnetic fields in our modern world.
