Lacking effective error compensation method is one of the important reasons that limit the advance of measurement precision of the grating ruler. A dynamic compensation method for eliminating the interpolation error of moiré fringe signals is put forward. The interpolation error is caused by zero offset, quadrature phase shift and unequal amplitude of two signals. Eight characteristic points (zero points and absolute amplitude joints of two channels signals) on a grating signal period is traced, and the zero offset of sinusoidal signal is separated from amplitude of characteristic points, and compensated. Then the compensated signal is traced, and the zero offset of cosinusoidal signal can also be separated and compensated. The compensative signal is traced continuely, the unequal amplitude error and the error of quadrature phase shift can be separated and compensated respectively. The above three errors can be totally compensated in no more than three grating signal periods. The influence of harmonics was analyzed and the improvement method was presented. Experiments verify this method's validity.