I think she just doesn't have anybody else for LOR's.
I'm asking if the LOR or reference carries credibility when using a peer.
If someone told me they "wouldn't mind" me writing them a letter there would be no way in hell I would even THINK about writing one for them. Anyways, direct co-worker would be very atypical and probably could cause problems. I'd go with a mediocre supervisory LOR than a good co-worker LOR.