If you have orange peel in the paint that you don't want once it's polished then keep wetsanding until it's all gone.

Once you have finished painting then don't worry about finding the cause of the orange peel unless you plan on painting another car. My guess of the cause though would be not enough thinning.

Dry sanding isn't a good idea at all. Every time that you dry sand you end up with a lot of pick-up on the sandpaper. If you were trying to sand paint dry then the pick-up would imprint all kinds of bizzar marks into the paint and leave you with a less-than-perfect finish.