Dec. 18 (Bloomberg) -- The U.S. dollar's credibility as the world's benchmark currency will be put to the test as it loses value against other major currencies, said George Magnus, senior economic adviser at UBS Investment Bank in London.

``We're clearly at a point where credibility is being stretched, and we don't really know what comes afterward,'' Magnus said in an interview.

Magnus said that while it's unlikely governments and companies in emerging economies in Asia and the Middle East are ready to ``ditch the dollar'' and price assets in other currencies in 2008, the dollar is being ``severely tested.''

Sovereign wealth funds are one example of institutions that are avoiding the falling dollar in favor of assets that will preserve their wealth, he said.

The dollar has lost value as traders bet the Federal Reserve will continue cutting interest rates to keep the housing slump from triggering a recession. It was down 7 percent against a trade-weighted basket of currencies from its biggest trading partners in the 12 months ended in November, based on Federal Reserve data.

``This is not something which we'll get closure on in three weeks,'' Magnus said. ``It takes a long time for reserve currencies to be born and to disappear, but we can see a stretching of credibility.''

Central banks have been trying to restore liquidity since the market for assets backed by U.S. subprime mortgages collapsed in August as foreclosures rose. Today, the European Central Bank added an unprecedented $500 billion to the banking system as part of that effort.

``For the moment, it seems to have had some effect,'' Magnus said. ``Clearly, the status quo was not tenable.''

Still, the move may fuel concerns about excessive growth in the money supply, he said.

The ECB ``will want to drain a substantial proportion of these funds,'' according to Magnus. ``They have to be really worried about what the money-supply implications are for inflation'' after today's operation, which will add about 2 percent to the euro-region's money supply, he said.

To contact the reporters on this story: Thomas Keene in New York at tkeene@bloomberg.netJoe Richter in Washington at jrichter1@bloomberg.net

Last Updated: December 18, 2007 14:34 EST