The decision was taken with the 49-year-old wanting to be closer to his family in England.
Coyle joined in December 2014 on a three-year deal but his side have struggled under his tenure.
They did not make the play-offs last year and are currently bottom of the Western Conference.
"I asked [club president] Chris [Canetti] if I could speak with him and I explained the challenge of being away from my family," Coyle told the club website.
"I'd like to thank the Dynamo supporters, who have been outstanding. We have a brilliant club, and I have no doubt success is just around the corner."