When converting a raw DNG file to a lossy DNG file from within Lightroom Classic, the setting "File Extension" is ignored. This setting determines whether the resulting file extension will be DNG (upper case) or lower case (dng).
With other types of raw files, it works ok. But with raw DNGs, the resulting lossy DNG file keeps the same case from the original file.
The only way to make it honor the File Extension setting is to uncheck the box "Delete originals after successful conversion". In this case, the correct case is applied, albeit the resulting file is altered ("-2" is added), and of course, one has to go and manually delete the originals if they are no longer needed. So it's just a workaround for a feature which I think is not working as designed in this specific situation.
In this video the problem is demonstrated (you have to pay attention to the "Filename" field in the Metadata panel after each conversion: