Sorry for the delay, I wanted to run the updated configuration for long enough to validate the change.
Updating the input from "MonitorNoHandle://$WINDIR\System32\Dns\dns.log" to "MonitorNoHandle://C:\Windows\System32\Dns\dns.log" does indeed resolve the issue. What's really odd though is the $WINDIR variable seems to be working in other inputs. For example, "monitor://$WINDIR\WindowsUpdate.log" being enabled does not generate the error.
My guess is that the issue is something specific to the resolution of environment variables by the MonitorNoHandle process. While all of our systems do have C: for the OS drive, it would be more ideal to use the environment variable to protect against edge cases. Is there any thing else we can do to troubleshoot further, or is it time for a bug report?
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