with the type of diabetes that your dad has, he still produces insulin -- but either not enough for his body or his body is not using it as effeciently. Approx 90% of this type of diabetic is overweight, and this is often a major contributing factor to the onset of the disease. Losing weight -- however it is done -- is helpful for these reasons. However, exercise is essential because it not only can help to reduce weight, it also makes the insulin that he does produce more effective. Also, many of the complications that accompany diabetes affect the heart, nerves, circulation, etc -- all things that can also benefit from exercise and good diet. In some cases, people who take their diet and exercise seriously can go off medication entirely (but only if it is something that the doctor advises and they are carefully monitored).
edit: as far as weight, as long as he is not much over the standard weights (which can vary so ask the doctor) that is good. He does not need to be underweight.