The password is stored encrypted in the FME Server database (table public.fme_parameter), e.x.
fme_decrypt(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
I have no idea how secure it is since the algorithm used isn't public knowledge.
If you need better security I highly recommend you look into named database connections rather than using parameters:
https://docs.safe.com/fme/html/FME_Desktop_Documentation/FME_Workbench/!NamedConnections/Using_Database_Connections.htm