A wireless displacement sensor is proposed which is composed of a fixed active head and a passive head which moves relatively to a grating scale. The passive head comprises a grating and two mirrors. It can be so small as to be inserted non-obtrusively where the displacement must be measured without spoiling the system optimum by undesirable size and structural compromises. It is insensitive to electromagnetic perturbations. The key characteristics of the sensor are high resolution and a very small size. The encoder uses a fixed grating scale as in standard designs, a passive-optical read head on the moving element and a stationary, opto-electronic source/detector module. Communication between the moving head and the detector module is done without cables using a free-space optical interconnection.