A linearly diffracted laser encoder that has high tolerance of head-to-scale misalignment and a high signal-to-noise ratio is described. The preservation of parallelism between the incident and the diffracted beams, which can be attributed to a built-in folded 1x telescope, allows for the high alignment tolerance. It can be shown that, by coupling this newly developed circular polarization interferometer configuration with grating scale geometry optimization, one can eliminate the problems associated with signal distortion that arise from various efficiencies of the p- and the s-polarized light beams and obtain a high signal-to-noise ratio. Both theoretical and experimental results are presented to confirm the improved results and performance.