Fear not-- thousands of people use Fiddler to capture WebClient traffic every day, so we'll get this working.
If using "localhost.fiddler" results in a DNS failure, that means that your client is not using the proper proxy settings. I assume that you've confirmed that your application is using .NET4 and not an earlier version? Do you have any web.config or app.config files that may be overriding the default machine.config proxy settings?
If you're debugging locally, you can also temporarily debug by simply assigning the WebClient's Proxy
Check out the Telerik Platform - the only platform that combines a rich set of UI tools with powerful cloud services to develop web, hybrid and native mobile apps.