I think we should stop saying "squatter" about the dragon, unless it turns out it sneakily moved in just last year or something. Dwarfs lost Karak Eight Peaks three thousand years ago. That's long enough to become indigenous in most places IRL. Dwarfs are so inhumanly bitter and grudge-holding they're pushing the equivalent of Babylonian revanchism and being upset about the destruction of the Hanging Gardens by the Assyrians. (attributed to Sennacherib ca. 700BC)
On the other hand, AFAIK, neither the dragon nor the dwarfs have signed onto any sort of international treaty regarding such things, so this doesn't give the dragon any rights as such, the dwarfs will probably be onboard with killing a "settler" or "indigenous" dragon instead if they can't come to an agreement about letting it stay in their Karak.