One guide which will get the seat height in the ballpark is to place the bike beside a wall then get on it with one pedal down fully. Now place your heel on the pedal spindle. You should be able to either straighten your leg fully or bend your knee a bit without rocking your hips. Do this with shoes with low heels. (I like more leg bend and do this in socks only.) Your legs should never be straight throughout the pedal stroke.
Next, look at the seat forward and back position. A string with a weight hung from the nose of the seat should land around a 1/2" or less forward of the bottom bracket (for your quite small bike).
If those settings are OK and your legs are that close to the handlebars, then it may be that the handlebars are too low or too close. Both can be addressed with a longer stem or a stem that angles up more. But really, it is better to ignore the knee issue and focus on where you like your hands and how much forward lean you want. (Note that this may well change, going to more lean and a longer reach as you get used to riding.)
Ride it some more and tell us more about how it feels. If you are new to cycling, welcome to a great new world! And if not, well, just welcome!
Ben