* Fed now projects first rate hike in 2023 * U.S. dollar advances to two-month peak * Palladium down 1%, silver gains 0.4% * Gold fell more than 2.5% on Wed (Recasts and updates prices) June 17 (Reuters) - Gold prices pared early gains on Thursday to hover near their lowest levels in more than a month, bruised by an elevated dollar and yields after the U.S. Federal Reserve signalled it might raise interest rates sooner than expected. Gold is often seen as a hedge against inflation, though a rate hike by the Fed will increase the opportunity cost of holding bullion and dull its appeal. Spot gold was steady at $1,813.80 per ounce, as of 0654 GMT, having climbed up to 0.7% earlier in the session on bargain-hunting. U.S. gold futures were down 2.6% at $1,812.20 per ounce. “Gold was crushed overnight by a more hawkish Fed. It has staged a modest recovery in Asia, but the rally looks more like speculative dip buying and fast money short-covering, than a vote of confidence in the yellow metal,” said Jeffrey Halley, a senior market analyst at OANDA. “The recovery in gold should be approached with caution as we have yet to see how a change in tone from the Fed will fully play out in markets. Gold’s daily close below $1,797.50 will signal a deeper correction is in prospect.” Gold prices slipped more than 2.5% on Wednesday, hitting their lowest since May 6, after hawkish comments from Fed officials lifted the dollar to a two-month high, while U.S. Treasury yields jumped. The Fed on Wednesday began closing the door on its pandemic-driven monetary policy with 11 of 18 central bank officials projecting at least two quarter-point interest rate increases for 2023. . “Bargain-hunting, safe-haven demand and buying the dips emerged as gold fell to $1,804, although the change in Fed’s script had benefited the dollar and Treasury yields rather than precious metals in the immediate term,” Avtar Sandu, a senior commodities manager at Phillip Futures, said in a note. Silver was steady at $26.97 per ounce, while palladium dropped 1% to $2,770.72 and platinum was flat at $1,122. (Reporting by Brijesh Patel in Bengaluru; Editing by Subhranshu Sahu and Sherry Jacob-Phillips) Our Standards: The Thomson Reuters Trust Principles.