I’m not familiar with that convention, but I’m not surprised. If cursive is a bunch of squiggles, then dots help you tell the difference between, say, <in> and <m>. Same applies for ÿ: helps differentiate, for example, a final Latin <ii> (which could have been spelled <ij>) from a y.
At a guess.
Upsilon in Mediaeval Greek had a diaeresis for the same reason.
EDIT: This post Google Groups corroborates the use of <ÿ> to differentiate it from <g> in German handwriting.