Is sensor in watch causing burns on skin?

The red circle is not a result of the sensors as if this was a burn caused by sensors, the interior of the circle would be red. It's not. It's where the case is landing on your wrist, which is evidently the issue based on the photo you posted.

You should stop wearing your watch and get tested for allergies to the materials in your watch by seeing a doctor.

Unless there is something seriously wrong with your Watch, it is most likely an allergy or other rash and not a burn. Stop wearing the watch and consult with your doctor.

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We want to make sure you reach the right team for help with your device. We recommend that you contact Apple Support directly. Depending on your region, you might be able to contact them here: Get Support.