From reader harleyhooch:
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I am Choctaw and Squaw is not offensive.
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From reader P.R.:
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I am part Lakota Sioux and know other 'half-breeds' from other tribes/. I have been told that Squaw is an Indian word for "pussy" which is why it is offensive. Honkey means what you said it did-a white person- but there are MANY nuances with it that can alter the meaning to the extent where it is hard to tell if it is really offensive. For example, my cousin who is a teacher in Des Moines, Iowa was told it referred to a white person driving their car through a black neighborhood and honking the horn enough to shake up the residents. Offensive, yes, but not necessarily derogatory.
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MrF says:

The Wikipedia article on "squaw" discusses claims that the word means "vagina" rather than "woman" and concludes that such claims are not supported by the historical evidence.

As to the term "honky", part of the political correctness canon these days seems to be that if an ethnic group considers a term referring to them to be offensive and derogatory, then it is, regardless of the etymology or derivation, and in my opinion, if that applies to "squaw", then it should also apply to "honky".