It means that the cypres are towering above the walls.I would translate it as

[…] pretty shuttered wooden houses, and high walls dominated by cypres.

A subordinating conjunction que refers to something introduced previously, and its role is always (direct) object in the subordinate clause. (To make it the subject of the subordinate clause, qui would be used instead; and in the case of an indirect object, dont or à qui, au(x)quel(le)(s), etc. are the proper conjunctions.)

In your sentence, que refers to “les hauts murs”, and the intended meaning is “Des cyprès dominent les hauts murs”. It’s a bit tricky, because inside a subordinate clause introduced by que, the subject is often found (not always) after the verb. Example:

Comment savoir ce que réserve l’avenir ?
Comment savoir ce que l’avenir réserve ? (also correct, same meaning)