It’s a cliche and before it became a cliche a character muttering during a fantastic event ‘I must be dreaming’ still never worked for me.
The tired bit has a long and stories track record which even includes Goldfinger as Bond mutters the phrase when he awakes and Pussy Galore tells him her name. Here’s why this particular trope has never convinced me that the character’s reaction is authentic.
Never once in any dream that I can remember have I ever considered for a moment that I was dreaming. No matter how fantastic or mundane or improbable the events, locals, or characters that appear in my dreams at the moment they occur they accepted as established reality. Recently I dreamt that I was attending some event and the governor of California was there, not Newsom just some generic guy, dressed in the terrible plaid jacket with stripped slacks. I was about to comment that his style was worse that the mayor of Amity in Jaws but then noticed that Murray Hamilton, who0 played the mayor, was not only sitting right beside me but wearing an identical outfit.
I do not associate with either high ranking politicians or actors and Hamilton dies in 1986 but none of this caused even the slightest hesitation in my acceptance of this reality. It is dream-logic and as you experience it is it solid and unquestioned.
The ‘I must be dreaming’ utterance is a weak shortcut to try and pull out of the character some emotional experience to their current situation. Writers would be better off if at the moment that are tempted to type those words if they stopped and searched for a more intimate and personal way to express the character’s wonderment.