How the AD Sync utility communicate to the Hosted Exchange AD. Does it communicate using LDAP protocol or http between customer and Hosted Exchange AD ?

Patrick, the ADSync tool uses LDAP for communication with the Hosted Exchange AD. The following link might be helpful for you:
http://portal.hostingcont...-users-attributes.aspx
 
By the way, do you wish to create Exchange mailboxes on local AD accounts?
 

Currently it pull the password and attribute information in simple text format, how do we enforce to use SSL. What setting shall be made at Exchange Hosted AD for this purpose ?

To use ADSync using SSL  make sure that LDAP-S is configured on the Cloud Active Directory, to accept and allow communication using ldaps.
General Info sharing for LDAP-S configuraiton on DC 
http://support.microsoft.com/kb/321051
 
How to enable LDAP over SSL with a third-party certification authority 
http://social.technet.microsoft.com/wiki/contents/articles/2980.ldap-over-ssl-ldaps-certificate.aspx
 
Verification Ldaps communication:
To verify if secure ldaps is establishing connection with remote Cloud AD.
On Customer Local AD machine where HC ADSync utility is running go to start > Run > type (without quote)  "ldp" > Connection tab > connect.
Server : Insert the Cloud DC URL name on which certificate is installed
Port : 636
SSL : Enable this option