How old is your niece?
When did she started to develop allergy symptoms?

That seems ridiculous --- how can another person's consumption of milk affect a child? Is your niece allergic to the "energy" or the "effect of milk? I'd say your sister is over reacting!

It is possible for a person who has drank milk or touched milk to cause a reaction in another person. The problem lies in the sensitivity to the allergy. For teenagers and adults, being kissed after the other person has drank milk can potentially cause major problems. But it all lies in sensitivity. From one person who is seriously allergic to dairy products, be careful with the child. She is still learning.

I see ... we are talking about physical contact with milk. Sorry to jump to conclusions. So some people have a skin reaction when around milk?

Symptoms of milk allergy appear only after milk has been intake orally.
Showing skin allergic reactions on milk doesn't mean that the way allergen came in contact with body was through skin.
There are some protein products of milk digestion, that when come in touch with the immune system are recognized as unwanted and harmful proteins. Hence, the reactions start.
The allergy reactions can be manifested like Skin reactions, Stomach and Intestinal Reactions and Nose, Throat and Lung Reactions.
They can appear within minutes, several hours or after more than 20 hours, or even days after intake.

My son has a milk allergy. He broke out in hives when milk splattered on his face, but that was the only reaction from external contact. I know of another mom who tested her son's allergy by drinking milk and then kissing him on the cheek.

Symptoms of milk allergy appear MAINLY after milk has been intake orally (milk is for drinking ). Showing skin allergic reactions on milk doesn't ALWAYS mean that the way allergen came in contact with body was through skin, because skin allergic reactions can be a part of systemic allergy reactions.
Besides blood, stool and oral test, a skin allergy test (a small amount of the milk protein is inserted just under the surface of the child's skin with a needle. If a red, raised spot called a wheal emerges, the child may have milk allergy) can be ordered like additional one.

My son has been tested (blood test) for food allergies and dairy came back moderate to severe. My first clue was not the milk splattered on the face. Unfortunately his first reaction was more severe than just a few hives. I guess I'm just trying to say that I can relate to the original post. After you see your child have a reaction like that, you really don't want them anywhere near the things they're allergic to. I probably overreact and go the extra mile to protect him. I'm hoping he'll outgrow this allergy (he's only 16 mo. old), and I'll probably start with bringing milk into contact with his skin before I give him some to drink.

Cow's milk is one of the most common allergy-causing foods in children, and it's the leading cause of allergic reactions in very young children.
But, most children outgrow a milk allergy by age 2 or 3.