MONEY MARKETS-After stress tests, now what?

* Money market unaffected by bank stress test results

* 3-month euro Libor inches up, spread over OIS steady

* Dollar Libor down as Fed outlook eyed

By Burton Frierson and Ian Chua

NEW YORK/LONDON, July 26 (Reuters) - Short-term interest rate markets breathed a sigh of relief on Monday as Europe's bank stress tests passed without incident, allowing analysts to resume speculating on when central banks might begin to tighten.

There was no obvious answer, however, as markets headed in different directions, with short-term interbank costs rising for euros, but falling for dollars.

The U.S. Federal Reserve has already shuttered its emergency liquidity facilities, but is still seen in no hurry to raise interest rates, keeping closely watched three-month dollar Libor USD3MFSR= headed lower.

The Fed outlook will keep the three-month dollar Libor rate, which is now at a two-month low, in check and while the U.S. banking sector had its troubles during the credit crisis two years ago, confidence has returned to keep funding rates low.

But some analysts say its downside is probably limited unless growth deteriorates to the point that the Fed announces new measures to stimulate the economy, something it appears reluctant to do at this point.

"Here, I think Libor is going to settle in and I don't think it is going to to substantially lower," said John Spinello, Treasury bond strategist at Jefferies & Co in New York.

"There is no anxiety between the banks here. Corporate spreads continue to do well. I think the bank stocks are doing OK. There's no tremors coming out of any banks so there comfort lending to one another," he added.

Three-month dollar Libor was fixed at 0.48750 percent, the lowest since late May and down from Friday's 0.49313 percent. For more on Libor fixings, see [ID:nEAP000044]

MOPPING UP

Despite euro Libor's rise, analysts said the market did not reflect credit anxieties. Instead, they said the absence of nasty surprises would allow the European Central Bank continue to withdraw liquidity.

Such a move by the ECB would keep upward pressure on euro money market rates, which grew after banks paid back 442 billion euros of one-year emergency loans to the ECB on July 1, wiping a chunk of excess liquidity from the market.

"The result of the stress test gives comfort to the ECB in terms of their exit strategy and so the market basically fixes the Euribor higher, expecting the money market curve to converge to a fair level at the end of the year," said Alessandro Tentori, a strategist at BNP Paribas.

This means the overnight Eonia rate EONIA=, set at 0.5 percent on Friday, will creep up toward and even surpass the ECB's benchmark refinancing rate of 1.0 percent over time, though it slipped on Monday. A move up to 1.0 percent would signify a return to a more normal, functioning market.

Eonia is a weighted average rate of all overnight unsecured bank-to-bank lending transactions.

The ECB will probably draw comfort from the result that showed only 7 banks out of 91 failed, and continue withdrawing its extraordinary liquidity support introduced at the height of the financial crisis following the collapse of Lehman Brothers. For more on the stress test, click on [ID:nSGE66P089]

"The stress tests didn't really impact the interbank markets to any great extent," said ICAP analyst Chris Clark, adding the forward markets, having factored in an improvement in money market stress levels last week, were little changed as well.