How can I trace which city an email is coming from which has a fake IP address?

If the IP is spoofed you may not be able to. If you have the full header you may be able to trace it back to the first jump

How do you know the IP is fake?

If this is a spam issue, don't waist your time. If this is a serious issue then you might want to contact you email provider for some assistance. All emails are logged. But they won't help you if it's not serious. Like life or death serious.

Email giants like Gmail will also only work with you if you have a court order.

Hope this helps...
Grant

The IP in the header will merely identify the e-mail server that it was sent from, and NOT the location of the sender.