Router, Dremel, tiny hand saw, "chain drilling" with appropriate cleanup afterwards - these are just a few of the logical options.
I wouldn't rule out the hole saw pictured above, but I'd use it with drill press.
Last week I did a very neat job in a tenor ukulele. I used a sharp 1-3/4" Forstner bit in the drill press. Had some help - had the instrument clamped immobile against a vertical fence, and one of our guys holding the neck to eliminate any vibration.
Job went super smoothly, with only a quick swipe of 220 grit sandpaper to clean it up before a light coating of shellac on the cut edge.
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Cheers,
Frank Ford
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