SQL Server Connection String: Can the password be encrypted in line?
This is more for SO than DBA, but if you are using the identity/password for the app pool in IIS it will encrypt the password for you when it is stored. However, be aware that even with this process passwords can still be decrypted with not much work.

The connection string itself does not allow you to enter an encrypted password, the mechanism that is saving the connection string handles encrypting sensitive data (or should).