。
She's wearing a nice watch.
Literal
She [topic-は] lovely wristwatch [object-を] is-wearing.
腕時計をする uses する in its 'to wear' sense — a usage specific to accessories like watches, rings, ties, and scarves. Japanese has a set of specialized 'wear' verbs where English uses just one: する for accessories, 着る for upper-body clothing, はく for lower-body items and shoes, かぶる for headwear, and かける for glasses.