Eric,
When I need something that small I prefer dremel bits with 1/8" shank.
In this case - check dremel model 9901 bit - spiral solid carbide multi-flute bit (I mean multi-flute, not 2 or 3 flutes). HD has it, Sears has a similar bit with Craftsman name. In most bits the weakest point is transition, so for a 1/8" cutting diameter bit 1/8" shank is actually the best as long as the bit is not too long. You will need to have 1/8" collet, either there are reducers from 1/4" to 1/8" or there are small routers that come with 1/8" collet originally. I have a rotozip which I use as my trim router and it comes with 1/8" collet. Rotozip also includes circle-cutting attachement. If I were to attempt the cut like you are trying, I would use rotozip with that attachement and no table.
When I need something that small I prefer dremel bits with 1/8" shank.
In this case - check dremel model 9901 bit - spiral solid carbide multi-flute bit (I mean multi-flute, not 2 or 3 flutes). HD has it, Sears has a similar bit with Craftsman name. In most bits the weakest point is transition, so for a 1/8" cutting diameter bit 1/8" shank is actually the best as long as the bit is not too long. You will need to have 1/8" collet, either there are reducers from 1/4" to 1/8" or there are small routers that come with 1/8" collet originally. I have a rotozip which I use as my trim router and it comes with 1/8" collet. Rotozip also includes circle-cutting attachement. If I were to attempt the cut like you are trying, I would use rotozip with that attachement and no table.

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