Cloak and Dagger adjective
Marked by melodramatic intrigue and often by espionage - American Heritage Dictionary
Existing or operating in a way so as to ensure complete concealment and confidentiality: clandestine, covert, huggermugger, secret, sub rosa, undercover. - Roget's Thesaurus
For such a well known phrase you'd suspect that "Cloak and Dagger" would have a more interesting etymology. The origin of the phrase has, however, nothing to do with espionage activity or covert operations at all.
The most likely origin of the phrase comes from a style of Spanish plays prevelant in the 17th century known as "comedias de capa y espada" or "comedies of cloak and sword". This phrase seems to have made its first appearences in the English language in the 1840s. Longfellow mentions it in his diary where he states "In the afternoon read La Dama Duenda of Calderon - a very good comedy of 'cloak and sword'". Dickens also uses the phrase about a year later but this time in the form of "Cloak and Dagger" as it has since stayed.
The style of play was made famous by two different writers, Miguel de Cervantes and Felix Lope de Vega. Comedias de capa y espada are a form of classical comedy and love intrigues (classical comedies like those written by Moliere have remarkably in common with what we now would consider a 'comedy'). They are called "cloak and sword" dramas simply because the main characters wear cloaks and carry swords. As a dramatic style they tend to be formulaic and have a tendancy to revolve around a young, naive, provincial nobleman who becomes lost in a deceptive court.
The reason why "cloak and dagger" is now used as a phrase to refer (often in a slightly tongue in cheek manner) to espionage and spies would seem to come from the importance of disguise in the plays of this style. Central to many of these plays are scenes involving the main characters disguised as something they are not, men as women, noblemen as paupers etc., this has the tendency to also cause much comic misidentity as the characters fall in love with the wrong people, but of course also adds to the air of intrigue. In these plays there is also a large element of underhanded plotting. This tends to follow the lines of a (normally nasty) character trying to marry the nice noblewoman for money and/or power. The similarities between this and modern day espionage are obvious.
These plays can be highly enjoyable to watch, but are, of course, best understood and appreciated when viewed in light of the social and political situation of 17th century Spain.
American Heritage Dictionary
Various university resources from, amongst others, Wagner and Purdue
and of course trusty Google.