Well, I did find that when I put a few feet between me and DS (on a mattress across the room, between around 8 and 16 months), that he did manage to give me a longer stretch of 4 to 5 hours, whereas right next to me he woke more often. Whether that's because of smelling the milk, or some other factor, I couldn't say. And both my DDs did sleep longer with DH than they did with me. Some of that, though, has to be because I'm such a restless sleeper, and DH is not.
So I don't know. The idea maybe has some truth in it, that if the breast is so readily available, baby will wake for it. But I think it's more that a baby put to sleep in a separate place, and not responded to, and not fed during the night, soon learns that there's no point in calling out or crying when he awakens, because nobody will come, so he stops crying out. He may still be waking during the night, but his parents are unaware of it. And even if the smell of milk is waking baby-- it wouldn't, if baby wasn't wanting milk, right?
I think that putting some space between you and baby is a good idea to try when nightwaking is wearing you down, especially in the second half of the first year, or in the toddler years. Try putting a sidecarred crib on your bed, or try a mattress on the floor next to your bed. Often it will help baby to give you one longer stretch. As long as you are still responding to baby when baby does wake, there's no harm in trying it. But I wouldn't do a separate room before at least a year old. I don't think it's safe for a baby to be left unattended so long. We're not a long-term co-sleeping family but we do sleep with our babies until they can get to a sitting position on their own easily.