The 45-year-old, who had a spell as a player at Headingley between 1990 and 1995, spent eight years as Essex coach before leaving at the end of 2015.
He replaces Richard Pyrah as Diamonds boss, with the latter to assist new Yorkshire head coach Andrew Gale.
"The opportunity to work with an elite female team is really exciting for me," Grayson told the club website.
Yorkshire Diamonds will start their 2017 Super League campaign with a Roses game against Lancashire Thunder on 11 August.
The two sides won only one game each in the round-robin group stage of the inaugural competition last summer.

Robert Gray, 60, from Bearsden, submitted a string of false VAT returns to HM Revenue and Customs (HMRC) between October 2011 and August 2013.
Dumbarton Sherriff Court heard that the fabricated returns, which had been "carefully planned", triggered VAT repayments he was not entitled to.
Gray was caught following an investigation by HMRC.

Lancashire's loss to Warwickshire meant Hampshire needed to win to survive.
They declared on 245-9 to leave Durham 296 from a minimum of 78 overs for victory, which they reached to end the hosts' two-year stay in the top tier.
Mark Stoneman (137) and Scott Borthwick (88) excelled in their last innings for Durham before they join Surrey in 2017.
England all-rounder Ben Stokes (23 not out) struck the winning runs for the visitors.
Hampshire had opted to bat on during the morning session to extend their lead close to 300 and, with Lancashire struggling at Edgbaston, it soon became clear that only a win would be enough for survival.
Ryan Pringle's 7-107 indicated that Hampshire's spinners would be their best hope of success, but a second-wicket stand of 162 between Stoneman and Borthwick ended their chances of achieving safety.

The reactor at Yongbyon has been the source of plutonium for North Korea's nuclear weapons programme.
The White House said North Korea should "focus instead on fulfilling its international obligations".
The reactor was shut down in 2007 as part of a disarmament-for-aid deal.
But Pyongyang vowed to restart it in 2013, following its third nuclear test and amid high regional tensions.
White House spokesman Josh Earnest said the international community would not accept North Korea as a nuclear state.
"We will work with our partners in the context of the six-party talks to try to return North Korea to a posture of fulfilling those commitments that they have made," he said.
"We will repeat our call that North Korea should refrain from the irresponsible provocations that aggravate regional tension and should focus instead on fulfilling its international obligations and commitments."
Six-nation talks involving South Korea, the US, China, Japan and Russia aimed at ending the North's nuclear programme have been stalled since 2009.
Experts believe that, when fully operational, the Yongbyon reactor can make one nuclear bomb's worth of plutonium per year.
A US think-tank said this year that satellite images suggested work had started at the Yongbyon complex.
But Tuesday's announcement was the first official confirmation from North Korea that it had restarted operations there.
The state-run news agency KCNA said North Korea was improving its nuclear weapons "in quality and quantity".
It said that the North was ready to face US hostility with "nuclear weapons any time".
However, experts say North Korea's nuclear capabilities are unclear.
Pyongyang claims it has made a device small enough to fit a nuclear warhead on to a missile, which it could launch at its enemies. But US officials have cast doubt on the claim.
North Korea has made bellicose threats against its neighbours and the US before, often to coincide with annual joint military exercises held by South Korea and US forces.
The two Koreas remain technically at war, because the 1950-1953 war ended in an armistice, not a peace treaty.
Yorkshire Diamonds have appointed Paul Grayson as their head coach on a deal until the end of 2019.
[NEXT_CONCEPT]
A man from East Dunbartonshire has been jailed for two years after pleading guilty to a £50,000 VAT fraud.
[NEXT_CONCEPT]
Hampshire were relegated from County Championship Division One after suffering a six-wicket home defeat by Durham in the season's final game.
[NEXT_CONCEPT]
The US has warned North Korea to refrain from "irresponsible provocation" after the communist state said its main nuclear facility had resumed normal operations.