The Galway native will lead the Reds as they attempt to secure promotion back to the Women's Super League after relegation last season.
Fahey, 32, joined Liverpool after a season with Bordeaux in 2018. Fahey spent six seasons with Arsenal after joining the club in 2008 while she also played with their London rivals Chelsea for two seasons.
She said being named Liverpool captain is "an amazing feeling".
Fahey will take over from Sophie Bradley-Auckland, who has opted out of football this season due to her work as a care home manager. "It's a very unselfish decision for Sophie to put her care home first and the vulnerable people that are there. But that's the type of person she is," Fahey said.
A dream come true 🤗
Big season ahead 👊
Tribute paid to @sophiebradley2 ❤️
Captain, vice captain and manager reaction... pic.twitter.com/lOm4sWVZf2— Liverpool FC Women (@LiverpoolFCW) August 17, 2020
On being given the armband, Fahey said: "For me as a supporter, now being captain is beyond my wildest dreams and I’m going to embody the spirit of the club through my captaincy and bring out the values of a Liverpool player.
"It’s been a really enjoyable pre-season and we’re working really hard to get back up to the Women’s Super League, where we feel we belong. We’re under no illusions that we need to be at the top of our game in every game. We have to be up for the fight but also show our qualities."
