CLOTH: Can Two Different Skeletal Mesh's/Moveable Static Meshes with Cloth interact with physics?

I have a character who i want to hold a rag in her hands. She has active cloth physics and the rag itself is a skeletal mesh with cloth physics but the rag always ignores her physics bodies. I can parent it to her hand and it will follow the transforms but am I to understand that cloth dynamics ignore other movable objects and sketetal meshes?

I do have environment interaction turned on.