Translation:Yes, I know.
Why is το used here?
In English it really should be "Yes, I know it/that". Το is the verb's object.
It's just customary in Greek to say το ξερω, even if you're not referring to a specific "it"
I think this is kind of similar to Spanish Lo sé. Someone will understand if you just say yo sé, but it's more idiomatic to say Lo sé. In Gk, το is a direct object that probably sounds more idiomatic. Literally, "I know it."