diff --git a/packages/cli/src/config/settings-validation.test.ts b/packages/cli/src/config/settings-validation.test.ts
index e6f920e44b..01cd545cde 100644
--- a/packages/cli/src/config/settings-validation.test.ts
+++ b/packages/cli/src/config/settings-validation.test.ts
@@ -13,6 +13,7 @@ import {
   settingsZodSchema,
 } from './settings-validation.js';
 import { z } from 'zod';
+import { type Settings } from './settingsSchema.js';
 
 describe('settings-validation', () => {
   describe('validateSettings', () => {
@@ -325,6 +326,90 @@ describe('settings-validation', () => {
       const result = validateSettings(validSettings);
       expect(result.success).toBe(true);
     });
+
+    describe('type casting', () => {
+      it('should cast "true" and "false" strings to booleans', () => {
+        const settings = {
+          ui: {
+            autoThemeSwitching: 'true',
+            hideWindowTitle: 'false',
+          },
+        };
+
+        const result = validateSettings(settings);
+        expect(result.success).toBe(true);
+        const data = result.data as Settings;
+        expect(data.ui?.autoThemeSwitching).toBe(true);
+        expect(data.ui?.hideWindowTitle).toBe(false);
+      });
+
+      it('should cast boolean strings case-insensitively', () => {
+        const settings = {
+          ui: {
+            autoThemeSwitching: 'TRUE',
+            hideWindowTitle: 'fAlSe',
+          },
+        };
+
+        const result = validateSettings(settings);
+        expect(result.success).toBe(true);
+        const data = result.data as Settings;
+        expect(data.ui?.autoThemeSwitching).toBe(true);
+        expect(data.ui?.hideWindowTitle).toBe(false);
+      });
+
+      it('should cast numeric strings to numbers', () => {
+        const settings = {
+          model: {
+            maxSessionTurns: '42',
+            compressionThreshold: '0.5',
+          },
+        };
+
+        const result = validateSettings(settings);
+        expect(result.success).toBe(true);
+        const data = result.data as Settings;
+        expect(data.model?.maxSessionTurns).toBe(42);
+        expect(data.model?.compressionThreshold).toBe(0.5);
+      });
+
+      it('should reject invalid castable strings', () => {
+        const settings = {
+          ui: {
+            autoThemeSwitching: 'not-a-boolean',
+          },
+          model: {
+            maxSessionTurns: 'not-a-number',
+          },
+        };
+
+        const result = validateSettings(settings);
+        expect(result.success).toBe(false);
+        expect(result.error?.issues).toHaveLength(2);
+        expect(result.error?.issues[0].message).toContain(
+          'Expected boolean, received string',
+        );
+        expect(result.error?.issues[1].message).toContain(
+          'Expected number, received string',
+        );
+      });
+
+      it('should cast strings to booleans/numbers in shared definitions (refs)', () => {
+        const settings = {
+          mcpServers: {
+            'test-server': {
+              command: 'node',
+              trust: 'true', // from boolean ref
+            },
+          },
+        };
+
+        const result = validateSettings(settings);
+        expect(result.success).toBe(true);
+        const data = result.data as Settings;
+        expect(data.mcpServers?.['test-server'].trust).toBe(true);
+      });
+    });
   });
 
   describe('formatValidationError', () => {
diff --git a/packages/cli/src/config/settings-validation.ts b/packages/cli/src/config/settings-validation.ts
index 9921f6c6cc..829cec506e 100644
--- a/packages/cli/src/config/settings-validation.ts
+++ b/packages/cli/src/config/settings-validation.ts
@@ -25,10 +25,10 @@ function buildZodSchemaFromJsonSchema(def: any): z.ZodTypeAny {
   if (def.type === 'string') {
     // eslint-disable-next-line @typescript-eslint/no-unsafe-type-assertion
     if (def.enum) return z.enum(def.enum as [string, ...string[]]);
-    return z.string();
+    return buildPrimitiveSchema('string');
   }
-  if (def.type === 'number') return z.number();
-  if (def.type === 'boolean') return z.boolean();
+  if (def.type === 'number') return buildPrimitiveSchema('number');
+  if (def.type === 'boolean') return buildPrimitiveSchema('boolean');
 
   if (def.type === 'array') {
     if (def.items) {
@@ -133,9 +133,22 @@ function buildPrimitiveSchema(
     case 'string':
       return z.string();
     case 'number':
-      return z.number();
+      return z.preprocess((val) => {
+        if (typeof val === 'string' && val.trim() !== '') {
+          const num = Number(val);
+          if (!isNaN(num)) return num;
+        }
+        return val;
+      }, z.number());
     case 'boolean':
-      return z.boolean();
+      return z.preprocess((val) => {
+        if (typeof val === 'string') {
+          const lower = val.toLowerCase();
+          if (lower === 'true') return true;
+          if (lower === 'false') return false;
+        }
+        return val;
+      }, z.boolean());
     default:
       return z.unknown();
   }
@@ -160,7 +173,9 @@ function buildZodSchemaFromDefinition(
   if (definition.ref === 'TelemetrySettings') {
     const objectSchema = REF_SCHEMAS['TelemetrySettings'];
     if (objectSchema) {
-      return z.union([z.boolean(), objectSchema]).optional();
+      return z
+        .union([buildPrimitiveSchema('boolean'), objectSchema])
+        .optional();
     }
   }
 
diff --git a/packages/cli/src/config/settings.test.ts b/packages/cli/src/config/settings.test.ts
index af0e47b99f..3896a7f5de 100644
--- a/packages/cli/src/config/settings.test.ts
+++ b/packages/cli/src/config/settings.test.ts
@@ -479,6 +479,137 @@ describe('Settings Loading and Merging', () => {
       expect(settings.merged.security?.folderTrust?.enabled).toBe(false); // Workspace setting should be used
     });
 
+    it('should resolve environment variables and cast them to correct types before validation', () => {
+      vi.stubEnv('TEST_AUTO_THEME', 'false');
+      vi.stubEnv('TEST_MAX_TURNS', '15');
+
+      (mockFsExistsSync as Mock).mockImplementation(
+        (p: fs.PathLike) =>
+          path.normalize(p.toString()) === path.normalize(USER_SETTINGS_PATH),
+      );
+      (fs.readFileSync as Mock).mockImplementation(
+        (p: fs.PathOrFileDescriptor) => {
+          if (
+            path.normalize(p.toString()) === path.normalize(USER_SETTINGS_PATH)
+          ) {
+            return JSON.stringify({
+              ui: { autoThemeSwitching: '$TEST_AUTO_THEME' },
+              model: { maxSessionTurns: '$TEST_MAX_TURNS' },
+            });
+          }
+          return '{}';
+        },
+      );
+
+      const settings = loadSettings(MOCK_WORKSPACE_DIR);
+
+      expect(settings.merged.ui.autoThemeSwitching).toBe(false);
+      expect(settings.merged.model.maxSessionTurns).toBe(15);
+      expect(settings.errors).toHaveLength(0);
+    });
+
+    it('should use default values from environment variable placeholders', () => {
+      vi.stubEnv('TEST_AUTO_THEME', ''); // Should trigger default
+      delete process.env['TEST_AUTO_THEME'];
+
+      (mockFsExistsSync as Mock).mockImplementation(
+        (p: fs.PathLike) =>
+          path.normalize(p.toString()) === path.normalize(USER_SETTINGS_PATH),
+      );
+      (fs.readFileSync as Mock).mockImplementation(
+        (p: fs.PathOrFileDescriptor) => {
+          if (
+            path.normalize(p.toString()) === path.normalize(USER_SETTINGS_PATH)
+          ) {
+            return JSON.stringify({
+              ui: { autoThemeSwitching: '${TEST_AUTO_THEME:-true}' },
+            });
+          }
+          return '{}';
+        },
+      );
+
+      const settings = loadSettings(MOCK_WORKSPACE_DIR);
+
+      expect(settings.merged.ui.autoThemeSwitching).toBe(true);
+      expect(settings.errors).toHaveLength(0);
+    });
+
+    it('should record validation errors if expansion result is invalid', () => {
+      vi.stubEnv('TEST_MAX_TURNS', 'not-a-number');
+
+      (mockFsExistsSync as Mock).mockImplementation(
+        (p: fs.PathLike) =>
+          path.normalize(p.toString()) === path.normalize(USER_SETTINGS_PATH),
+      );
+      (fs.readFileSync as Mock).mockImplementation(
+        (p: fs.PathOrFileDescriptor) => {
+          if (
+            path.normalize(p.toString()) === path.normalize(USER_SETTINGS_PATH)
+          ) {
+            return JSON.stringify({
+              model: { maxSessionTurns: '$TEST_MAX_TURNS' },
+            });
+          }
+          return '{}';
+        },
+      );
+
+      const settings = loadSettings(MOCK_WORKSPACE_DIR);
+
+      expect(settings.errors.length).toBeGreaterThan(0);
+      expect(settings.errors[0].message).toContain(
+        'Expected number, received string',
+      );
+      // Should fall back to the expanded string value
+      expect(settings.merged.model.maxSessionTurns).toBe('not-a-number');
+    });
+
+    it('should preserve environment variable placeholders on save', () => {
+      vi.stubEnv('TEST_AUTO_THEME', 'true');
+      const placeholder = '${TEST_AUTO_THEME:-false}';
+
+      (mockFsExistsSync as Mock).mockImplementation(
+        (p: fs.PathLike) =>
+          path.normalize(p.toString()) === path.normalize(USER_SETTINGS_PATH),
+      );
+      (fs.readFileSync as Mock).mockImplementation(
+        (p: fs.PathOrFileDescriptor) => {
+          if (
+            path.normalize(p.toString()) === path.normalize(USER_SETTINGS_PATH)
+          ) {
+            return JSON.stringify({
+              ui: { autoThemeSwitching: placeholder },
+            });
+          }
+          return '{}';
+        },
+      );
+
+      // Load settings - this will expand the placeholder for runtime use
+      const loaded = loadSettings(MOCK_WORKSPACE_DIR);
+      expect(loaded.merged.ui.autoThemeSwitching).toBe(true);
+
+      // Verify that the original settings for the user scope still have the placeholder
+      const userFile = loaded.forScope(SettingScope.User);
+      expect(userFile.originalSettings.ui?.autoThemeSwitching).toBe(
+        placeholder,
+      );
+
+      // Save settings - this should use the originalSettings (with placeholders)
+      const mockUpdate = vi.mocked(updateSettingsFilePreservingFormat);
+      saveSettings(userFile);
+
+      expect(mockUpdate).toHaveBeenCalledWith(
+        USER_SETTINGS_PATH,
+        expect.objectContaining({
+          ui: expect.objectContaining({
+            autoThemeSwitching: placeholder,
+          }),
+        }),
+      );
+    });
+
     it('should use system folderTrust over user setting', () => {
       (mockFsExistsSync as Mock).mockReturnValue(true);
       const userSettingsContent = {
diff --git a/packages/cli/src/config/settings.ts b/packages/cli/src/config/settings.ts
index b84c1bda40..aace550a25 100644
--- a/packages/cli/src/config/settings.ts
+++ b/packages/cli/src/config/settings.ts
@@ -673,7 +673,9 @@ function _doLoadSettings(workspaceDir: string): LoadedSettings {
   const storage = new Storage(workspaceDir);
   const workspaceSettingsPath = storage.getWorkspaceSettingsPath();
 
-  const load = (filePath: string): { settings: Settings; rawJson?: string } => {
+  const load = (
+    filePath: string,
+  ): { settings: Settings; rawSettings: Settings; rawJson?: string } => {
     try {
       if (fs.existsSync(filePath)) {
         const content = fs.readFileSync(filePath, 'utf-8');
@@ -689,14 +691,19 @@ function _doLoadSettings(workspaceDir: string): LoadedSettings {
             path: filePath,
             severity: 'error',
           });
-          return { settings: {} };
+          return { settings: {}, rawSettings: {} };
         }
 
         // eslint-disable-next-line @typescript-eslint/no-unsafe-type-assertion
         const settingsObject = rawSettings as Record<string, unknown>;
 
-        // Validate settings structure with Zod
-        const validationResult = validateSettings(settingsObject);
+        // Expand environment variables
+        const expandedSettings = resolveEnvVarsInObject(
+          settingsObject as Settings,
+        );
+
+        // Validate settings structure with Zod after environment variable expansion
+        const validationResult = validateSettings(expandedSettings);
         if (!validationResult.success && validationResult.error) {
           const errorMessage = formatValidationError(
             validationResult.error,
@@ -707,9 +714,22 @@ function _doLoadSettings(workspaceDir: string): LoadedSettings {
             path: filePath,
             severity: 'warning',
           });
+          return {
+            settings: expandedSettings,
+            rawSettings: settingsObject as Settings,
+            rawJson: content,
+          };
         }
 
-        return { settings: settingsObject as Settings, rawJson: content };
+        // Return the successfully cast and validated data
+        return {
+          // Since we've successfully validated expandedSettings against settingsZodSchema,
+          // it's safe to cast the resulting data to the Settings type.
+          // eslint-disable-next-line @typescript-eslint/no-unsafe-type-assertion
+          settings: (validationResult.data as Settings) ?? expandedSettings,
+          rawSettings: settingsObject as Settings,
+          rawJson: content,
+        };
       }
     } catch (error: unknown) {
       settingsErrors.push({
@@ -718,33 +738,40 @@ function _doLoadSettings(workspaceDir: string): LoadedSettings {
         severity: 'error',
       });
     }
-    return { settings: {} };
+    return { settings: {}, rawSettings: {} };
   };
 
   const systemResult = load(systemSettingsPath);
   const systemDefaultsResult = load(systemDefaultsPath);
   const userResult = load(USER_SETTINGS_PATH);
 
-  let workspaceResult: { settings: Settings; rawJson?: string } = {
+  let workspaceResult: {
+    settings: Settings;
+    rawSettings: Settings;
+    rawJson?: string;
+  } = {
     settings: {} as Settings,
+    rawSettings: {} as Settings,
     rawJson: undefined,
   };
   if (!storage.isWorkspaceHomeDir()) {
     workspaceResult = load(workspaceSettingsPath);
   }
 
-  const systemOriginalSettings = structuredClone(systemResult.settings);
+  const systemOriginalSettings = structuredClone(systemResult.rawSettings);
   const systemDefaultsOriginalSettings = structuredClone(
-    systemDefaultsResult.settings,
+    systemDefaultsResult.rawSettings,
+  );
+  const userOriginalSettings = structuredClone(userResult.rawSettings);
+  const workspaceOriginalSettings = structuredClone(
+    workspaceResult.rawSettings,
   );
-  const userOriginalSettings = structuredClone(userResult.settings);
-  const workspaceOriginalSettings = structuredClone(workspaceResult.settings);
 
-  // Environment variables for runtime use
-  systemSettings = resolveEnvVarsInObject(systemResult.settings);
-  systemDefaultSettings = resolveEnvVarsInObject(systemDefaultsResult.settings);
-  userSettings = resolveEnvVarsInObject(userResult.settings);
-  workspaceSettings = resolveEnvVarsInObject(workspaceResult.settings);
+  // Environment variables for runtime use are already resolved and validated in load()
+  systemSettings = systemResult.settings;
+  systemDefaultSettings = systemDefaultsResult.settings;
+  userSettings = userResult.settings;
+  workspaceSettings = workspaceResult.settings;
 
   // Support legacy theme names
   if (userSettings.ui?.theme === 'VS') {