The official GPG binary from "c:\Program Files (x86)\GnuPG\bin\gpg.exe" does not exhibit this problem. I will report it to the msys2 folks.

Yes, it is the msys2 build of gpg, installed using the standard msys2 methods. The pwd in my example was from msys2 zsh.
I reproduced the error running under msys2 zsh and in Powershell.
If I understand your response correctly, you are saying this will not be fixed in gnupg itself? I can report it to the cygwin/msys2 folks of course, if you think that is best. But I still suspect the root cause is in gnupg, probably in homedir.c or the code that makes an absolute path from a relative one.
I will retest with the official gpg4win and let you know the results.