You're not meant to fight that dragon at this point, you'll just get bodied. You're supposed to use the transformation scroll item to temporarily turn into a monster and sneak past (note you change back when you change screen, so you have to walk into the area with the dragon, but not too close, then transform and fly past).
Hi, does anyone has a tip on how to kill a dragon after you go up a mountain with an old lady? I'm only with lulu in the party and the dragon is ridiculously strong.