Let me answer your unstated question first: No, this does not mean that your child is homosexual, a transvestite, a transsexual, or anything else for that matter.
Lots of boys his age do exactly the same thing. And lots of girls that age reject dolls and frilly clothes in favor of "boy things." (When my wife was your son's age, her parents gave her a baby doll for Christmas. She became upset and insisted that they take it back to the store and trade it for the toy truck she wanted.)
So what's going on here? Odds are it's because your son identifies strongly with his mother as a source of love, power, nurturance, and wisdom. It's no wonder that he'd like to try out things that he associates with Mom. Sexuality and sexual orientation have nothing to do with it.
I suggest that you compliment him on his creativity with the towel. And while you're at it, show him how it can also be a superhero's cape, the sail of a boat, and lots of other things that might capture his budding imagination. So relax and have fun together!