Our old dog is afraid of our new dog. What can we do to fix the situation?

We are owners of a Cavalier King Charles 2 year old female. We have been discussing the prospect of adding a 'buddy'? for her to our home and finally decided that it was time. We also decided it would be a rescue from the Cavalier Rescue of Chicago.

About 10 days ago we drove with our dog (Sophie) to the foster home to meet Merlin (male 2 years old). The foster home had 3 other cavaliers in the home so everyone was at ease when we introduced Sophie. The immediate attention to one another was a good sign and there was no aggression whatsoever, but it was evident by Sophie's 'humping' that she was exerting dominance, at least in that environment. We spent about 2 hours there and then left. The following weekend (3 days ago) we went to pick Merlin up. After a good length of time we left the home with Merlin in a crate in the car and Sophie in her dog bed. The 2 hour drive home was uneventful.

After we arrived home we took them both for a long walk before returning to the home for the first time. We went in first and then allowed them in. Sophie went straight for her water bowl while Merlin explored. Other than that not much happened. That evening we crated Merlin in our room while allowing Sophie to sleep in her bed which is also in our room.

Merlin has absolutely no anxiety issues and has taken to his new home rapidly but starting early yesterday it's as if somebody has stolen Sophie's personality. She has become spooked, withdrawn, and lethargic and wants nothing to do with anything. When Merlin is around she tries to hide or cowers in the corner. Last evening we crated Merlin in out spare room for the night instead of our room and this morning Sophie seemed fine, for all of about 5 minutes, then we let Merlin out and she is scared stiff and immediately depressed. They have both had separate long walks today and we have separated them, Sophie in with me while I work and Merlin in with Julie while she works. We have taken them on a dual walk today to our local pet store which Sophie knows well and she was back to normal while in the shop. We know the owner and he gave us some assurances but I need as much advise as I can get.

We just brought out Merlin to my work area and although hesitant and looking to move to a corner, Sophie has settled by me (very close) and they are both resting. However she shook for several minutes before settling down.

So it seems we have the opposite of most of what I read about dogs fighting when introductions are made with a new dog. We have a new dog introduction in Merlin who is bouncing around and loving his new place but resident dog has lost all her zest and wants nothing to do with fun and sleeps and hides when Merlin is around. There has been no aggression on either side and I'm hoping this is just a phase. If it's not we don't want to lose our dog to this new side we are seeing and if this is to be the case long term will most likely consider returning the rescue to the breeder who was fostering her.

Thank you in advance for any advice you can give.

Cheers,
Boyd

PS. Both are fixed, Sophie & Merlin around between 16 & 18 pounds, we are good dog owners and do not let them rule the roost whether walking them (we keep them slightly behind us) or in the home.