diff --git a/crates/nu-command/src/core_commands/overlay/use_.rs b/crates/nu-command/src/core_commands/overlay/use_.rs
index 20eee56795..61df0f9fc2 100644
--- a/crates/nu-command/src/core_commands/overlay/use_.rs
+++ b/crates/nu-command/src/core_commands/overlay/use_.rs
@@ -130,6 +130,9 @@ impl Command for OverlayUse {
             if let Some(block_id) = module.env_block {
                 let maybe_path = find_in_dirs_env(&name_arg.item, engine_state, caller_stack)?;
 
+                let block = engine_state.get_block(block_id);
+                let mut callee_stack = caller_stack.gather_captures(&block.captures);
+
                 if let Some(path) = &maybe_path {
                     // Set the currently evaluated directory, if the argument is a valid path
                     let mut parent = path.clone();
@@ -137,12 +140,9 @@ impl Command for OverlayUse {
 
                     let file_pwd = Value::string(parent.to_string_lossy(), call.head);
 
-                    caller_stack.add_env_var("FILE_PWD".to_string(), file_pwd);
+                    callee_stack.add_env_var("FILE_PWD".to_string(), file_pwd);
                 }
 
-                let block = engine_state.get_block(block_id);
-                let mut callee_stack = caller_stack.gather_captures(&block.captures);
-
                 let _ = eval_block(
                     engine_state,
                     &mut callee_stack,
@@ -157,11 +157,6 @@ impl Command for OverlayUse {
 
                 // Merge the block's environment to the current stack
                 redirect_env(engine_state, caller_stack, &callee_stack);
-
-                if maybe_path.is_some() {
-                    // Remove the file-relative PWD, if the argument is a valid path
-                    caller_stack.remove_env_var(engine_state, "FILE_PWD");
-                }
             } else {
                 caller_stack.add_overlay(overlay_name);
             }