Here's how I got it to work. Simply turn ON the remote cursor and turn off the local cursor. Then you see where the pointer really is on the iPhone 4. It's not perfect and there will be a brief moment of disorientation as you move your cursor from your desktop into the VNC client window. Still, it works.
I am using TightVNC Portable 1.3 for Windows over WiFi with:
Encoding: Tight
Use 8 bit color
Scale by 50%
Track Remote Cursor Locally
No Local Cursor
I am still hoping that Saurik will update this as well as some of his other apps but no one knows for sure. He has not answered any tweets on the subject so far.