Some do, some don't. Not much different from the Pennsylvania Dutch ... they just haven't changed their way of dressing for several hundred years.
Fine clothing is worn on Sabbath and holy-days.
Hanukkah has no special clothing associated with it. It is not even a particularly religious festival (it is mainly a historical commemoration). Some families like to dress up in the evenings, for...
Religious Jews strive to dress tastefully and modestly, avoiding whatever is loud, very tight, or revealing. Men and married women cover their heads.
Modest ones. Men wear kippahs, talleisim, and tfillin.