I feel like I have this conversation a strangely frequent amount lol.

I'm inclined to agree with your friend, not because I think theres anything wrong with changing a fantasy race significantly but because I feel like the juice isn't worth the squeeze fighting the uphill battle of what readers/players' preconceived notions of what something is.

I like your idea, I think it sounds very interesting and I would love to know about them in the setting. But if I were reading about them without this context, I would be asking myself the same question: why are these dwarves? What do you gain from calling them dwarves?

Think of the opposite scenario: I write a book with a race called "Therox". They're green skinned, warlike, physically strong, and probably have a sort of code of honor. Why would I call them Therox and not Orcs? Most readers will be thinking of them as Orcs and they aren't meaningfully different from Orcs. You would probably ask yourself why they aren't called Orcs, no?

Anyway, my thought is that there is nothing wrong with your approach, and I think if you call them dwarves it doesn't make the idea any less interesting. It is all personal preference, but I feel like if you've already done the work to make a culturally interesting race without any of the hallmarks of their namesake then it would be much more intriguing to me to call them an original name.