where does the domain live.com come in the picture? If you are sending email via that domain then you will need to use valid microsoft live credentials to log in. If this is even possible... my memory is the free @live mail didn't allow external smtp connections.
If you are using dreamhost smtp, then the plug in must be configured to use email @yourdomain.
In anycase your post is not very clear about what you are actually doing. It seems like you are mixing a dreamhost email rule with trying to use external SMTP that may or may not be possible to use.