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Your finger is wide enough to cover multiple IR sensors. The driver measures the amount of light blocked at each location, and can interpolate based on what proportion of the outer two sensors are covered. It can read the center position accurately, but a stylus that is too thin may not cast a shadow in some postions, as I mentioned above. If you look at "teardown" photos of the Touch, you will see that there are really not many LEDs and photodiodes, but still it achieves excellent resolution for a "stylus" as wide as a finger.
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