diff --git a/bin/exec.ml b/bin/exec.ml
index 7d6d7ae063a3..d18191afb0c5 100644
--- a/bin/exec.ml
+++ b/bin/exec.ml
@@ -82,7 +82,8 @@ module Command_to_exec = struct
       let path = Path.to_string path in
       let env = Env.to_unix env |> Spawn.Env.of_list in
       let argv = path :: args in
-      Spawn.spawn ~prog:path ~env ~argv ()
+      let cwd = Spawn.Working_dir.Path Fpath.initial_cwd in
+      Spawn.spawn ~prog:path ~env ~cwd ~argv ()
     in
     Pid.of_int pid
   ;;
diff --git a/doc/changes/10262.md b/doc/changes/10262.md
new file mode 100644
index 000000000000..ed07efcb3262
--- /dev/null
+++ b/doc/changes/10262.md
@@ -0,0 +1 @@
+- Fix bug with `dune exec --watch` where the working directory would always be set to the project root rather than the directory where the command was run (#10262, @gridbugs)
diff --git a/test/blackbox-tests/test-cases/exec-watch/exec-pwd.t/run.t b/test/blackbox-tests/test-cases/exec-watch/exec-pwd.t/run.t
index 722c924e9ccd..f1ee08d2e39d 100644
--- a/test/blackbox-tests/test-cases/exec-watch/exec-pwd.t/run.t
+++ b/test/blackbox-tests/test-cases/exec-watch/exec-pwd.t/run.t
@@ -10,7 +10,7 @@ In normal (non-watching) mode, pwd is the folder from which dune is launched
   $ rm -rf $OUTPUT
   $ cd ..
 
-While in watch mode, pwd is always the root project folder
+In watch mode, pwd is also the folder from which dune is launched.
   $ cd bin
   $ dune exec --root .. -w -- pwd > $OUTPUT &
   Entering directory '..'
@@ -20,6 +20,6 @@ While in watch mode, pwd is always the root project folder
   $ until test -s $OUTPUT; do sleep 0.1; done;
   $ kill $PID
   $ cat $OUTPUT
-  $TESTCASE_ROOT
+  $TESTCASE_ROOT/bin
   $ rm -rf $OUTPUT
   $ cd ..