The story
Because the garment is manufactured by cutting a central circle out of a larger, circular piece of fabric.
Etymology from Wiktionary, CC BY-SA 4.0.
circle skirt
Today it means: A skirt cut in sections to make one or more circles with a hole for the waist, so the skirt is very full but hangs smoothly from the waist without darts, pleats, or gathers. Full definition →