Is Fiddler running directly on the machine infected with malware?
Generally speaking, malware running on a machine has the ability to change every byte in the user's memory space and every pixel on the screen, so in theory, it would be quite trivial for malware to interfere with Fiddler or any other software. In practice, however, malware doesn't bother interfering with Fiddler (if it did, it would probably bypass it entirely) and as a consequence professional forensic investigators do use Fiddler to inspect the behavior of malware.
To ensure that malware can't "modify" what's seen in Fiddler, run Fiddler on a different PC and point the infected PC's proxy settings at the clean PC running Fiddler. See http://www.fiddlerbook.com/fiddler/help/hookup.asp#Q-NonWindows
for more details.