What are you using the view the image, and is this the embedded preview image or actual raw-data conversion?
If it is the preview image, then what sort of quality is the preview set to be in the DNG Converter?
If this is the actual decoded raw data, then what sort of quality do you have your raw decoder set to do for DNGs?
Thank you for pointing out the problem. Preview from DNG Converter is JPEG.
My previous comment, above, is irrelevant.
The preview is JPEG, but I am working with the DNG file. So my original question remains unanswered.
I have found the same issue with RW2 files. I will investigate settings for FastStone Image Viewer (the program I am using for editing). So far I find no options to change treatment of DNG or RW2.
I have the same issue when converting JPEG to DNG. The checkbox "Use lossy compression" have no effect, checked or not I get a lossy DNG file. But only when using Camera Raw version greater than 5.4 (version 6.6 and up). Converting using camera raw version 5.4 the conversion will be to lossless DNG since you cannot choose lossy format with version 5.4.
Why I get a lossy DNG no matter the setting I don't know. An error?
You get a lossy indicator in the DNG because the JPG format is lossy. It doesn't mean that the image is being further degraded, only that the pixel data in the DNG is from a lossy source, your JPG, and may have artifacts.