diff --git a/cli/src/commands/router/commands/compose.ts b/cli/src/commands/router/commands/compose.ts
index 9b4f5e75e1..0fbcee3d88 100644
--- a/cli/src/commands/router/commands/compose.ts
+++ b/cli/src/commands/router/commands/compose.ts
@@ -30,6 +30,16 @@ import { composeSubgraphs, introspectSubgraph } from '../../../utils.js';
 
 const STATIC_SCHEMA_VERSION_ID = '00000000-0000-0000-0000-000000000000';
 
+/**
+ * Expands environment variables in a string using ${VAR_NAME} syntax.
+ * Consistent with Go's os.ExpandEnv() used in router config.yaml.
+ */
+export function expandEnvVars(content: string): string {
+  return content.replace(/\${([^}]+)}/g, (_, varName) => {
+    return process.env[varName] ?? '';
+  });
+}
+
 type ConfigSubgraph = StandardSubgraphConfig | SubgraphPluginConfig | GRPCSubgraphConfig;
 
 type StandardSubgraphConfig = {
@@ -183,7 +193,8 @@ export default (opts: BaseCommandOptions) => {
     }
 
     const fileContent = (await readFile(inputFile)).toString();
-    const config = yaml.load(fileContent) as Config;
+    const expandedContent = expandEnvVars(fileContent);
+    const config = yaml.load(expandedContent) as Config;
 
     const subgraphs: SubgraphMetadata[] = [];
 
diff --git a/cli/test/expand-env-vars.test.ts b/cli/test/expand-env-vars.test.ts
new file mode 100644
index 0000000000..6fed0ff8a8
--- /dev/null
+++ b/cli/test/expand-env-vars.test.ts
@@ -0,0 +1,50 @@
+/* eslint-disable no-template-curly-in-string */
+import { describe, test, expect, beforeEach, afterEach } from 'vitest';
+import { expandEnvVars } from '../src/commands/router/commands/compose.js';
+
+describe('expandEnvVars', () => {
+  const originalEnv = process.env;
+
+  beforeEach(() => {
+    process.env = { ...originalEnv };
+  });
+
+  afterEach(() => {
+    process.env = originalEnv;
+  });
+
+  test('replaces ${VAR} with environment variable value', () => {
+    process.env.TEST_VAR = 'hello';
+    expect(expandEnvVars('${TEST_VAR}')).toBe('hello');
+  });
+
+  test('replaces missing variable with empty string', () => {
+    delete process.env.NONEXISTENT_VAR;
+    expect(expandEnvVars('${NONEXISTENT_VAR}')).toBe('');
+  });
+
+  test('handles multiple variables in one string', () => {
+    process.env.VAR1 = 'foo';
+    process.env.VAR2 = 'bar';
+    expect(expandEnvVars('${VAR1} and ${VAR2}')).toBe('foo and bar');
+  });
+
+  test('handles adjacent variables', () => {
+    process.env.A = 'hello';
+    process.env.B = 'world';
+    expect(expandEnvVars('${A}${B}')).toBe('helloworld');
+  });
+
+  test('preserves text without variables', () => {
+    expect(expandEnvVars('no variables here')).toBe('no variables here');
+  });
+
+  test('handles variable in Authorization header context', () => {
+    process.env.API_TOKEN = 'secret123';
+    const input = `headers:
+  Authorization: "Bearer \${API_TOKEN}"`;
+    const expected = `headers:
+  Authorization: "Bearer secret123"`;
+    expect(expandEnvVars(input)).toBe(expected);
+  });
+});