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I suppose this is the most common generalized skin rash of newborns. It appears as a small blotchy red patch over any part of the body, but it seems to me to affect the face and trunk the most. In its classic form, there is a central pale yellow, slightly raised dot. This dot, when biopsied, is filled as I recall with allergy cells - eosinophils. Apparently, the rash has something to do with the newborn's adjustment to the outside world. Babies with erythema toxicum secrete natural antibiotic substances1 that protect against infection after birth. These substances are also found in the vernix, the cheesy material that covers the skin in babies before they reach term.
In any event, the rash is totally harmless and does not bother Baby in the least. It fades in a week or two. If I recall correctly, it affects 80% or more of babies, so you are bound to see a few patches. Forget about it.
Extensive erythema toxicum of the back. © Jeffrey Hull 2008
1. British Journal of Dermatology. 2002;147:1127-1134.