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I know this is a relatively old post, but I was just perusing around and just read it. I hope you took your toddler to the Dr! Poor little guy! I had very sensitive skin and eczema as a kid (it has gotten much better over time, now my skin is normal if not tending toward oily). Definitely have this looked at professionally. It could be an allergic reaction to something he eats or the soap you use on him, or related to his sensitive skin. As a kid I had to use special soap (i.e. Cetaphil). My friend whose kids have horribly sensitive skin uses only Cetaphil or Aveeno products on them. Also over-the-counter hydrocortisone cream couldn't hurt to try to reduce the inflammation, redness, and especially if it itches. Have it checked out, because if it is enduring, or if he scratches at it, it could lead to further infection and scarring.