this isn't just supply+demand
But if the exchange had half their USD bank account balances seized and froze half their customers' USD balances the effect would be the same -- freaked-out people would still rush for the exits by buying BTC, even though tradeable USD on the exchange had suddenly become scarce.
This isn't about supply and demand, it's about final delivery mechanisms during times of crisis.
the supply of USD from desperate owners would increase.
Er... how, exactly, would the supply rise?
Are you actually claiming that people would send new supplies of USD into an exchange that had just had its bank accounts seized and frozen customer balances? This makes no sense.
The root cause of this phenomenon is the finality of BTC. People demanding its ability to get them to the exits more quickly than USD is a secondary effect. Obviously supply and demand is involved, indirectly, in just about everything humans do. But that alone cannot explain this behavior.