Pennsylvania Dutch (also known as Pennsylvania German) derived from a dialect spoken by southwestern Germans. The ancestors of the language came from Southwestern Europe, where lots of people spoke German. It's believed that the dialect appeared after the merger of Rhine Franconian and Alemannic dialects. The result of that dialect levelling was a dialect very close to the eastern dialects of Palatinian, especially the rural dialects around Mannheim/Ludwigshafen.

Dutch has nothing to do with the Dutch people here: it's just a left over from an archaic sense of the English word "Dutch" which referred to any people speaking a non-peripheral continental West Germanic language on the European mainland.

More Info: en.wikipedia.org