ipv4.fiddler, how does it work?

Easy: Fiddler is a proxy, it gets to see almost(*) all of the requests. When it sees a request bound for "ipv4.fiddler", it simply changes it to 127.0.0.1.

(*)The only reason Fiddler needs this at all is that some HTTP stacks are hardcoded to bypass the proxy for "localhost" addresses. By using the magic string "ipv4.fiddler", you can circumvent that hardcoded restriction.