If you aren't close, I don't know how well it will come off if you tell her that she's doing something wrong. It doesn't matter how nicely you try to put it, it's likely she's going to get defensive. Like PPs said, if it's your brother's wife, I would talk to him about it and let him take care of it.
You CAN however, tell her not to smoke around you. Her baby, her choices; your baby, your choices. You can also ask her not to be around your baby if she continues to smoke.
ETA: I just re-read my first line - She is doing something wrong, but it isn't really your place to say. I might still say something, but that's me. It sounds like you are trying to keep peace. It comes down to keeping the peace or letting her know that she's wrong and hoping that she understands the potential damage she is doing to her baby.