diff --git a/pkg/query-service/app/logparsingpipeline/collector_config.go b/pkg/query-service/app/logparsingpipeline/collector_config.go
index dfef6070f9..c370441210 100644
--- a/pkg/query-service/app/logparsingpipeline/collector_config.go
+++ b/pkg/query-service/app/logparsingpipeline/collector_config.go
@@ -6,7 +6,9 @@ import (
 	"strings"
 	"sync"
 
-	"github.com/knadh/koanf/parsers/yaml"
+	"gopkg.in/yaml.v3"
+
+	"github.com/pkg/errors"
 	"go.signoz.io/signoz/pkg/query-service/constants"
 	coreModel "go.signoz.io/signoz/pkg/query-service/model"
 	"go.uber.org/zap"
@@ -14,11 +16,15 @@ import (
 
 var lockLogsPipelineSpec sync.RWMutex
 
-// check if the processors already exis
+// check if the processors already exist
 // if yes then update the processor.
 // if something doesn't exists then remove it.
 func buildLogParsingProcessors(agentConf, parsingProcessors map[string]interface{}) error {
-	agentProcessors := agentConf["processors"].(map[string]interface{})
+	agentProcessors := map[string]interface{}{}
+	if agentConf["processors"] != nil {
+		agentProcessors = (agentConf["processors"]).(map[string]interface{})
+	}
+
 	exists := map[string]struct{}{}
 	for key, params := range parsingProcessors {
 		agentProcessors[key] = params
@@ -44,7 +50,7 @@ type otelPipeline struct {
 	} `json:"pipelines" yaml:"pipelines"`
 }
 
-func getOtelPipelinFromConfig(config map[string]interface{}) (*otelPipeline, error) {
+func getOtelPipelineFromConfig(config map[string]interface{}) (*otelPipeline, error) {
 	if _, ok := config["service"]; !ok {
 		return nil, fmt.Errorf("service not found in OTEL config")
 	}
@@ -146,17 +152,51 @@ func checkDuplicateString(pipeline []string) bool {
 
 func GenerateCollectorConfigWithPipelines(
 	config []byte,
-	parsingProcessors map[string]interface{},
-	parsingProcessorsNames []string,
+	pipelines []Pipeline,
 ) ([]byte, *coreModel.ApiError) {
-	c, err := yaml.Parser().Unmarshal([]byte(config))
+	var c map[string]interface{}
+	err := yaml.Unmarshal([]byte(config), &c)
 	if err != nil {
 		return nil, coreModel.BadRequest(err)
 	}
 
-	buildLogParsingProcessors(c, parsingProcessors)
+	processors, procNames, err := PreparePipelineProcessor(pipelines)
+	if err != nil {
+		return nil, coreModel.BadRequest(errors.Wrap(
+			err, "could not prepare otel collector processors for log pipelines",
+		))
+	}
 
-	p, err := getOtelPipelinFromConfig(c)
+	// Escape any `$`s as `$$` in config generated for pipelines, to ensure any occurrences
+	// like $data do not end up being treated as env vars when loading collector config.
+	for _, procName := range procNames {
+		procConf := processors[procName]
+		serializedProcConf, err := yaml.Marshal(procConf)
+		if err != nil {
+			return nil, coreModel.InternalError(fmt.Errorf(
+				"could not marshal processor config for %s: %w", procName, err,
+			))
+		}
+		escapedSerializedConf := strings.ReplaceAll(
+			string(serializedProcConf), "$", "$$",
+		)
+
+		var escapedConf map[string]interface{}
+		err = yaml.Unmarshal([]byte(escapedSerializedConf), &escapedConf)
+		if err != nil {
+			return nil, coreModel.InternalError(fmt.Errorf(
+				"could not unmarshal dollar escaped processor config for %s: %w", procName, err,
+			))
+		}
+
+		processors[procName] = escapedConf
+	}
+
+	// Add processors to unmarshaled collector config `c`
+	buildLogParsingProcessors(c, processors)
+
+	// build the new processor list in service.pipelines.logs
+	p, err := getOtelPipelineFromConfig(c)
 	if err != nil {
 		return nil, coreModel.BadRequest(err)
 	}
@@ -166,14 +206,13 @@ func GenerateCollectorConfigWithPipelines(
 		))
 	}
 
-	// build the new processor list
-	updatedProcessorList, _ := buildLogsProcessors(p.Pipelines.Logs.Processors, parsingProcessorsNames)
+	updatedProcessorList, _ := buildLogsProcessors(p.Pipelines.Logs.Processors, procNames)
 	p.Pipelines.Logs.Processors = updatedProcessorList
 
 	// add the new processor to the data ( no checks required as the keys will exists)
 	c["service"].(map[string]interface{})["pipelines"].(map[string]interface{})["logs"] = p.Pipelines.Logs
 
-	updatedConf, err := yaml.Parser().Marshal(c)
+	updatedConf, err := yaml.Marshal(c)
 	if err != nil {
 		return nil, coreModel.BadRequest(err)
 	}
diff --git a/pkg/query-service/app/logparsingpipeline/controller.go b/pkg/query-service/app/logparsingpipeline/controller.go
index 066123c416..eed3befec5 100644
--- a/pkg/query-service/app/logparsingpipeline/controller.go
+++ b/pkg/query-service/app/logparsingpipeline/controller.go
@@ -171,13 +171,8 @@ func (pc *LogParsingPipelineController) RecommendAgentConfig(
 		return nil, "", model.InternalError(multierr.Combine(errs...))
 	}
 
-	processors, procNames, err := PreparePipelineProcessor(pipelines)
-	if err != nil {
-		return nil, "", model.BadRequest(errors.Wrap(err, "could not prepare otel collector processors for log pipelines"))
-	}
-
 	updatedConf, apiErr := GenerateCollectorConfigWithPipelines(
-		currentConfYaml, processors, procNames,
+		currentConfYaml, pipelines,
 	)
 	if apiErr != nil {
 		return nil, "", model.WrapApiError(apiErr, "could not marshal yaml for updated conf")
diff --git a/pkg/query-service/app/logparsingpipeline/pipelineBuilder_test.go b/pkg/query-service/app/logparsingpipeline/pipelineBuilder_test.go
index 0ef3ff71a5..2eeffaed2f 100644
--- a/pkg/query-service/app/logparsingpipeline/pipelineBuilder_test.go
+++ b/pkg/query-service/app/logparsingpipeline/pipelineBuilder_test.go
@@ -557,6 +557,57 @@ func TestPipelineFilterWithStringOpsShouldNotSpamWarningsIfAttributeIsMissing(t
 	}
 }
 
+func TestAttributePathsContainingDollarDoNotBreakCollector(t *testing.T) {
+	require := require.New(t)
+
+	testPipeline := Pipeline{
+		OrderId: 1,
+		Name:    "pipeline1",
+		Alias:   "pipeline1",
+		Enabled: true,
+		Filter: &v3.FilterSet{
+			Operator: "AND",
+			Items: []v3.FilterItem{
+				{
+					Key: v3.AttributeKey{
+						Key:      "$test",
+						DataType: v3.AttributeKeyDataTypeString,
+						Type:     v3.AttributeKeyTypeTag,
+					},
+					Operator: "=",
+					Value:    "test",
+				},
+			},
+		},
+		Config: []PipelineOperator{
+			{
+				ID:      "move",
+				Type:    "move",
+				Enabled: true,
+				Name:    "move",
+				From:    "attributes.$test",
+				To:      "attributes.$test1",
+			},
+		},
+	}
+
+	testLogs := []model.SignozLog{
+		makeTestSignozLog("test log", map[string]interface{}{
+			"$test": "test",
+		}),
+	}
+
+	result, collectorWarnAndErrorLogs, err := SimulatePipelinesProcessing(
+		context.Background(),
+		[]Pipeline{testPipeline},
+		testLogs,
+	)
+	require.Nil(err)
+	require.Equal(0, len(collectorWarnAndErrorLogs), strings.Join(collectorWarnAndErrorLogs, "\n"))
+	require.Equal(1, len(result))
+	require.Equal("test", result[0].Attributes_string["$test1"])
+}
+
 func TestTemporaryWorkaroundForSupportingAttribsContainingDots(t *testing.T) {
 	// TODO(Raj): Remove this after dots are supported
 
diff --git a/pkg/query-service/app/logparsingpipeline/preview.go b/pkg/query-service/app/logparsingpipeline/preview.go
index 4f725cafa5..8f991ee3da 100644
--- a/pkg/query-service/app/logparsingpipeline/preview.go
+++ b/pkg/query-service/app/logparsingpipeline/preview.go
@@ -14,7 +14,6 @@ import (
 	"go.opentelemetry.io/collector/processor"
 	"go.signoz.io/signoz/pkg/query-service/collectorsimulator"
 	"go.signoz.io/signoz/pkg/query-service/model"
-	"gopkg.in/yaml.v3"
 )
 
 func SimulatePipelinesProcessing(
@@ -42,14 +41,6 @@ func SimulatePipelinesProcessing(
 	}
 	simulatorInputPLogs := SignozLogsToPLogs(logs)
 
-	// Simulate processing of logs through an otel collector
-	processorConfigs, err := collectorProcessorsForPipelines(pipelines)
-	if err != nil {
-		return nil, nil, model.BadRequest(errors.Wrap(
-			err, "could not prepare otel processors for pipelines",
-		))
-	}
-
 	processorFactories, err := processor.MakeFactoryMap(
 		logstransformprocessor.NewFactory(),
 	)
@@ -65,12 +56,20 @@ func SimulatePipelinesProcessing(
 	// the number of logtransformprocessors involved.
 	// See defaultFlushInterval at https://github.com/open-telemetry/opentelemetry-collector-contrib/blob/main/pkg/stanza/adapter/emitter.go
 	// TODO(Raj): Remove this after flushInterval is exposed in logtransformprocessor config
-	timeout := time.Millisecond * time.Duration(len(processorConfigs)*100+100)
+	timeout := time.Millisecond * time.Duration(len(pipelines)*100+100)
+
+	configGenerator := func(baseConf []byte) ([]byte, error) {
+		updatedConf, apiErr := GenerateCollectorConfigWithPipelines(baseConf, pipelines)
+		if apiErr != nil {
+			return nil, apiErr.ToError()
+		}
+		return updatedConf, nil
+	}
 
 	outputPLogs, collectorErrs, apiErr := collectorsimulator.SimulateLogsProcessing(
 		ctx,
 		processorFactories,
-		processorConfigs,
+		configGenerator,
 		simulatorInputPLogs,
 		timeout,
 	)
@@ -95,36 +94,6 @@ func SimulatePipelinesProcessing(
 	return outputSignozLogs, collectorErrs, nil
 }
 
-func collectorProcessorsForPipelines(pipelines []Pipeline) (
-	[]collectorsimulator.ProcessorConfig, error,
-) {
-	processors, procNames, err := PreparePipelineProcessor(pipelines)
-	if err != nil {
-		return nil, err
-	}
-
-	processorConfigs := []collectorsimulator.ProcessorConfig{}
-	for _, procName := range procNames {
-		// convert `Processor` structs to map[string]interface{}
-		procYaml, err := yaml.Marshal(processors[procName])
-		if err != nil {
-			return nil, errors.Wrap(err, "could not marshal Processor struct")
-		}
-		var procConfRaw map[string]interface{}
-		err = yaml.Unmarshal(procYaml, &procConfRaw)
-		if err != nil {
-			return nil, errors.Wrap(err, "could not unmarshal proc yaml")
-		}
-
-		processorConfigs = append(processorConfigs, collectorsimulator.ProcessorConfig{
-			Name:   procName,
-			Config: procConfRaw,
-		})
-	}
-
-	return processorConfigs, nil
-}
-
 // plog doesn't contain an ID field.
 // SignozLog.ID is stored as a log attribute in plogs for processing
 // and gets hydrated back later.
diff --git a/pkg/query-service/collectorsimulator/collectorsimulator.go b/pkg/query-service/collectorsimulator/collectorsimulator.go
index 4a8236b483..e45c2d168a 100644
--- a/pkg/query-service/collectorsimulator/collectorsimulator.go
+++ b/pkg/query-service/collectorsimulator/collectorsimulator.go
@@ -7,11 +7,11 @@ import (
 	"strings"
 
 	"github.com/google/uuid"
-	"github.com/knadh/koanf/parsers/yaml"
 	"github.com/pkg/errors"
 	"go.opentelemetry.io/collector/component"
 	"go.opentelemetry.io/collector/confmap"
-	"go.opentelemetry.io/collector/confmap/provider/yamlprovider"
+	"go.opentelemetry.io/collector/confmap/converter/expandconverter"
+	"go.opentelemetry.io/collector/confmap/provider/fileprovider"
 	"go.opentelemetry.io/collector/connector"
 	"go.opentelemetry.io/collector/exporter"
 	"go.opentelemetry.io/collector/extension"
@@ -44,11 +44,12 @@ type CollectorSimulator struct {
 	inMemoryExporterId string
 }
 
+type ConfigGenerator func(baseConfYaml []byte) ([]byte, error)
+
 func NewCollectorSimulator(
 	ctx context.Context,
-	signalType component.DataType,
 	processorFactories map[component.Type]processor.Factory,
-	processorConfigs []ProcessorConfig,
+	configGenerator ConfigGenerator,
 ) (simulator *CollectorSimulator, cleanupFn func(), apiErr *model.ApiError) {
 	// Put together collector component factories for use in the simulation
 	receiverFactories, err := receiver.MakeFactoryMap(inmemoryreceiver.NewFactory())
@@ -85,9 +86,8 @@ func NewCollectorSimulator(
 	}
 
 	collectorConfYaml, err := generateSimulationConfig(
-		signalType,
 		inMemoryReceiverId,
-		processorConfigs,
+		configGenerator,
 		inMemoryExporterId,
 		collectorLogsOutputFilePath,
 	)
@@ -95,17 +95,42 @@ func NewCollectorSimulator(
 		return nil, cleanupFn, model.BadRequest(errors.Wrap(err, "could not generate collector config"))
 	}
 
-	// Parse and validate collector config
-	yamlP := yamlprovider.New()
+	// Read collector config using the same file provider we use in the actual collector.
+	// This ensures env variable substitution if any is taken into account.
+	simulationConfigFile, err := os.CreateTemp("", "collector-simulator-config-*")
+	if err != nil {
+		return nil, nil, model.InternalError(errors.Wrap(
+			err, "could not create tmp file for capturing collector logs",
+		))
+	}
+	simulationConfigPath := simulationConfigFile.Name()
+	cleanupFn = func() {
+		os.Remove(collectorLogsOutputFilePath)
+		os.Remove(simulationConfigPath)
+	}
+
+	_, err = simulationConfigFile.Write(collectorConfYaml)
+
+	if err != nil {
+		return nil, cleanupFn, model.InternalError(errors.Wrap(err, "could not write simulation config to tmp file"))
+	}
+	err = simulationConfigFile.Close()
+	if err != nil {
+		return nil, cleanupFn, model.InternalError(errors.Wrap(err, "could not close tmp simulation config file"))
+	}
+
+	fp := fileprovider.New()
 	confProvider, err := otelcol.NewConfigProvider(otelcol.ConfigProviderSettings{
 		ResolverSettings: confmap.ResolverSettings{
-			URIs:      []string{"yaml:" + string(collectorConfYaml)},
-			Providers: map[string]confmap.Provider{yamlP.Scheme(): yamlP},
+			URIs:       []string{simulationConfigPath},
+			Providers:  map[string]confmap.Provider{fp.Scheme(): fp},
+			Converters: []confmap.Converter{expandconverter.New()},
 		},
 	})
 	if err != nil {
 		return nil, cleanupFn, model.BadRequest(errors.Wrap(err, "could not create config provider."))
 	}
+
 	collectorCfg, err := confProvider.Get(ctx, factories)
 	if err != nil {
 		return nil, cleanupFn, model.BadRequest(errors.Wrap(err, "failed to parse collector config"))
@@ -201,9 +226,8 @@ func (l *CollectorSimulator) Shutdown(ctx context.Context) (
 }
 
 func generateSimulationConfig(
-	signalType component.DataType,
 	receiverId string,
-	processorConfigs []ProcessorConfig,
+	configGenerator ConfigGenerator,
 	exporterId string,
 	collectorLogsOutputPath string,
 ) ([]byte, error) {
@@ -215,6 +239,12 @@ func generateSimulationConfig(
       memory:
         id: %s
     service:
+      pipelines:
+        logs:
+          receivers:
+            - memory
+          exporters:
+            - memory
       telemetry:
         metrics:
           level: none
@@ -223,32 +253,5 @@ func generateSimulationConfig(
           output_paths: ["%s"]
     `, receiverId, exporterId, collectorLogsOutputPath)
 
-	simulationConf, err := yaml.Parser().Unmarshal([]byte(baseConf))
-	if err != nil {
-		return nil, err
-	}
-
-	processors := map[string]interface{}{}
-	procNamesInOrder := []string{}
-	for _, processorConf := range processorConfigs {
-		processors[processorConf.Name] = processorConf.Config
-		procNamesInOrder = append(procNamesInOrder, processorConf.Name)
-	}
-	simulationConf["processors"] = processors
-
-	svc := simulationConf["service"].(map[string]interface{})
-	svc["pipelines"] = map[string]interface{}{
-		string(signalType): map[string]interface{}{
-			"receivers":  []string{"memory"},
-			"processors": procNamesInOrder,
-			"exporters":  []string{"memory"},
-		},
-	}
-
-	simulationConfYaml, err := yaml.Parser().Marshal(simulationConf)
-	if err != nil {
-		return nil, err
-	}
-
-	return simulationConfYaml, nil
+	return configGenerator([]byte(baseConf))
 }
diff --git a/pkg/query-service/collectorsimulator/logs.go b/pkg/query-service/collectorsimulator/logs.go
index 7d67eb5d55..dc84e6fe56 100644
--- a/pkg/query-service/collectorsimulator/logs.go
+++ b/pkg/query-service/collectorsimulator/logs.go
@@ -12,17 +12,12 @@ import (
 	"go.signoz.io/signoz/pkg/query-service/model"
 )
 
-type ProcessorConfig struct {
-	Name   string
-	Config map[string]interface{}
-}
-
 // Simulate processing of logs through the otel collector.
 // Useful for testing, validation and generating previews.
 func SimulateLogsProcessing(
 	ctx context.Context,
 	processorFactories map[component.Type]processor.Factory,
-	processorConfigs []ProcessorConfig,
+	configGenerator ConfigGenerator,
 	logs []plog.Logs,
 	timeout time.Duration,
 ) (
@@ -30,7 +25,7 @@ func SimulateLogsProcessing(
 ) {
 	// Construct and start a simulator (wraps a collector service)
 	simulator, simulatorInitCleanup, apiErr := NewCollectorSimulator(
-		ctx, component.DataTypeLogs, processorFactories, processorConfigs,
+		ctx, processorFactories, configGenerator,
 	)
 	if simulatorInitCleanup != nil {
 		defer simulatorInitCleanup()
diff --git a/pkg/query-service/collectorsimulator/logs_test.go b/pkg/query-service/collectorsimulator/logs_test.go
index 796d19f00f..628c33c537 100644
--- a/pkg/query-service/collectorsimulator/logs_test.go
+++ b/pkg/query-service/collectorsimulator/logs_test.go
@@ -12,6 +12,11 @@ import (
 	"go.opentelemetry.io/collector/processor"
 )
 
+type ProcessorConfig struct {
+	Name   string
+	Config map[string]interface{}
+}
+
 func TestLogsProcessingSimulation(t *testing.T) {
 	require := require.New(t)
 
@@ -71,10 +76,13 @@ func TestLogsProcessingSimulation(t *testing.T) {
 	)
 	require.Nil(err, "could not create processors factory map")
 
+	configGenerator := makeTestConfigGenerator(
+		[]ProcessorConfig{testProcessor1, testProcessor2},
+	)
 	outputLogs, collectorErrs, apiErr := SimulateLogsProcessing(
 		context.Background(),
 		processorFactories,
-		[]ProcessorConfig{testProcessor1, testProcessor2},
+		configGenerator,
 		inputLogs,
 		300*time.Millisecond,
 	)
@@ -111,3 +119,41 @@ func makeTestPlog(body string, attrsStr map[string]string) plog.Logs {
 
 	return pl
 }
+
+func makeTestConfigGenerator(
+	processorConfigs []ProcessorConfig,
+) ConfigGenerator {
+	return func(baseConf []byte) ([]byte, error) {
+		conf, err := yaml.Parser().Unmarshal([]byte(baseConf))
+		if err != nil {
+			return nil, err
+		}
+
+		processors := map[string]interface{}{}
+		if conf["processors"] != nil {
+			processors = conf["processors"].(map[string]interface{})
+		}
+		logsProcessors := []string{}
+		svc := conf["service"].(map[string]interface{})
+		svcPipelines := svc["pipelines"].(map[string]interface{})
+		svcLogsPipeline := svcPipelines["logs"].(map[string]interface{})
+		if svcLogsPipeline["processors"] != nil {
+			logsProcessors = svcLogsPipeline["processors"].([]string)
+		}
+
+		for _, processorConf := range processorConfigs {
+			processors[processorConf.Name] = processorConf.Config
+			logsProcessors = append(logsProcessors, processorConf.Name)
+		}
+
+		conf["processors"] = processors
+		svcLogsPipeline["processors"] = logsProcessors
+
+		confYaml, err := yaml.Parser().Marshal(conf)
+		if err != nil {
+			return nil, err
+		}
+
+		return confYaml, nil
+	}
+}