Historically speaking, the old world used HYDRO power with just a bit of steam thrown in to create pressure activated devices. The Great Light House is written as having steam whistles, as did other, lesser constructs. Several recorded automatons used steam power in there functioning. But it was just easier for them to use water power (particularly water wheels), so that's what they primarily used. The romans used ASSEMBLY LINE processes and automated work to create the bread they feed their population with, for instance. The Chinese used water power to automate just about everything we did in the early industrial age (food, weaving, metal pounding and shaping, etc). The Chinese also had steam whistles and steam toys for the elite. But they didn't take it a step further, because they had the manpower, as well as the water power, to spare.
Dwarves MIGHT actually use steam power--- as a power source to pump water out of their mines due to the SCARCITY of physical labor. That's what the first steam engines were used for, and then civilization got ideas about using that system for other things, like driving boats on the water. However, so long as there is wind, dwarves are more likely to use windmills. However, with magma around, dwarves should be able to route water near the magma and create steam to do things with (ie, use pipes made of magma safe material, route water through the pipes near (adjacent to) magma, have mechanisms to transfer power from steam to cogs and go from there, etc. It could easily be done inside Dwarf Fortress. The question is, should it?
Steam does provide for the FUN that we are so well acquanted with. Exploding steam pipes detonating in your fortress, or having water pour on magma creating explosive steam cloud that boils and explodes all in its path. Great tragic story potential. But is it that worth it to drag down the computer processing our fortresses? Perhaps in 5 or 10 years, when another couple of generations of processors have rolled along, DF will be able to model all of that without causing us to live with 5 or 10 FPS as soon as we get "steam" to be processed.