"Fascinator" shares an etymology with "fascinate": Latin fascināre, to cast a spell on. The noun has long had an association with headgear: In the 19th and early 20th centuries a fascinator was a lightweight knitted or crocheted headscarf, as alluded to in the 1904 novel The Madigans: "She sat crocheting what she called a fascinator, her white bone needle moving harmoniously in and out of the blue wool." (Hat tip—or fascinator nod—to Wordnik.)
At some point in the mid-20th century "fascinator" slipped out of use ... and then reappeared with a new meaning. Here's Elaine Higgleton, editorial director of the Collins Language Division, explaining the shift in a November 2008 interview with Australia's ABC Radio National:
I don't know if fascinator's made a comeback in Australia but it's originally a very fine or lacy wool or lace head-shawl that a lady might wear over her head going out in the evening with her evening clothes. So it's something fine that you wear on your head. And as a word, that had pretty much fallen out of use by about 1969, the late 1960s, early 1970s. But it's made a real comeback in the last couple of years, because fascinator is the term that's now being used to describe the little, tiny headpieces that a woman might wear at something like a wedding, or if she goes to the races. They're made out of lace with feathers and flowers. Quite elaborate confections. Very delicate and frivolous-looking. And that's an example of a word that had a very valuable use, that kind of died away—people didn't use the word for anything—and it's been resurrected with a slightly new meaning. So it's [sic] usage has been extended now to still mean something that women wear on their heads that's fine and delicate, but it's not a shawl anymore; it's more of a hat-like confection.
My own research revealed that fascinator is very much in use (and in vogue) Down Under as well as in the U.K. and North America, where the craft revival and the steampunk trend have accelerated its acceptance. I found almost 12,000 results when I searched for "fascinator" on the craft site Etsy. The Scottish site Lavender Moon, where I found the image at the top of this post, sells nothing but fascinators "for weddings, christenings, a day at the races and cocktail or garden parties."