The incorporation of minor hollow natural fibers (HNF) can significantly accelerate the CO2 diffusion in reactive magnesia cement (RMC). The CO2 diffusivity in HNF is highly related to its internal moisture content (IMC), which subsequently affects the carbonation process of HNF-RMC, but this is outside the scope of the existing studies. Therefore, this work investigates the effect of IMC on carbonation, strength, and microstructure of HNF-RMC composites. HNF-RMC mortar specimens are dried to different levels of nominal IMC (0–100%), and cured under high CO2 concentration for carbonation. Following the curing, the matrix composition was characterized with varying techniques (QXRD, TGA, FTIR, and acid digestion) for quantifying the CO2 sequestration; the compressive strength at different depths was determined with uniaxial compressive test; the microstructure was examined with SEM/ESEM. The results show that the carbonation depth is increased by three to four times by reducing the IMC to 0%. The effects of varying IMC on local carbonation and strength are distinct in the shallow (0–20 mm) and middle/deep region (20–100 mm). In the shallow region, inadequate CO2 dissolution is the limiting factor, these performances decreased with the increasing desiccation. In the deeper regions, moisture absorption by HNF decreased the CO2 diffusivity, hence the CO2 availability is the limiting factor, and these performances increased with the desiccation. These observations suggest that the understanding that carbonation maximizes at a medium moisture level is not valid in HNF-RMC–controlling the moisture can be important for improving the CO2 sequestration and consequent mechanical strength.