The performance of all-optical wavelength converter based on the gain saturation effect in fiber grating external cavity LD is investigated. In order to eliminated the influence of the returned light and converted output light on the input signal source, and to increase coupling efficiency of input signal and output signal, a new optical scheme of converter using optical circulator are proposed. The experiment results show that wavelength conversion range is over 30 nm, and both up- and down-conversion are realized. Dynamic wavelength conversion for 155 Mbit/s NRZ input signal is presented.