Isabella seems designed to consider the entire map as "next to her empire". The current game I'm playing, she did a similar thing described by the OP; she shipped a settler + warrior 20ish squares across the map, ignoring at least 2 excellent city sites, to settle right on my southern border. I razed it.
Later on, I settled a city on the north coast (she's on the east coast), about 20+ squares from her border, and immediately she drops by to ask if I'll stop settling cities near her.
You can guess what I told her.
You ever hear of the Treaty of Tordesillas?
Btw - I agree - this is plain dumb by the AI. No other way to fathom it. Yes sometimes aggressively settling near an opponents capital is good strategy - can provoke an early war etc and seriously pisses me off when it happens to me if I don't have a ready military available (as it changes my whole early build priority instantly) but when its so far away to be undefendable - and with other civs around closer AND with Cerro de Potosi (which for Spain = won game almost) I don't know what to say - stupid stupid stupid AI.