Right or wrong doesn't matter, being a school event the principal has the right to make the rules. Furthermore, having experience in this area, the majority of parents can't be trusted to decide what's appropriate wear for their children. You may not like that, but it is a fact! Most parents either don't care or don't have the time to be burdened. Not all, but enough that it ruins it for everybody. And seriously, their upset over this trivial item. They could just not have the dance!
What's the difference between strapless and spaghetti straps? Yeah they both show the same amount of skin, but one is secure while the other comes down easily, exposing the breast, either by accident, on purpose or by the hands of a jerk who thinks he's being cute. It's called playing it safe, and anyways, this is a middle school, not a high school.
You may not agree with me about parents and that's fine, but I challenge you to spend some time at a high school, I think your mind will be changed. Our local high school has a first knuckle rule for skirt, dress and short length for girls and they take full advantage of it. I'm at the local high school at least twice a day dropping off and picking up my son and I've seen more ass cheek, and a few times a little more, than you would see at a nightclub on any given weekend.